What Does The Microsoft, Yammer Deal Say About The Prospects For Jive?

| About: Jive Software (JIVE)

The social media infrastructure investment world has been abuzz of late, with a series of acquisitions. In May, Intuit (NASDAQ:INTU) paid $423.5 million for Demandforce, a privately-held customer relationship management (C.R.M) firm. Microsoft (NASDAQ:MSFT) followed suit with its acquisition of privately-held Yammer for $1.2 billion, which represented a price-sales ratio of 20. Yammer competitor Jive Software, Inc. (NASDAQ:JIVE), which had declined from a post-IPO high of $28 per share in April to $14 in early June on lock-up expiration fears, has been on a tear since the acquisition of Yammer, rising nearly 50% in less than a month with above average volume to a current share price of $21.

It's a good time to take stock of the company and the prospects for the stock, and evaluate whether there is any further potential for price appreciation for Jive. Jive provides software solutions that enable more efficient communication and collaboration within (private) and beyond (public) corporate networks. Presently, the majority (62%) of their revenue is from public networks, and the company anticipates that those public networks that improve communication and collaboration with customers and collaborative firms will drive their business going forward. Their solutions are highly customizable, which has allowed the company to have a diverse user base, from large enterprise deployments to small businesses.

Fundamentally, Jive is expensive from a traditional perspective but inexpensive compared to the metrics related to the Microsoft/Yammer acquisition. Jive has a revenue base of $78 million but has been growing at a fast pace, with 75% annual growth rate (analysts are expecting that rate to continue in the current fiscal year) and a 10%+ sequential quarterly growth rate over the past three quarters. Even after the recent run-up in share price, it trades at 14 times sales, which is high for nearly any industry except small take-out targets in the cloud technology space.

The bullish case for Jive rests on the continued interest in cloud computing/enterprise social networking space that has allowed for rich financial metrics. If Jive meets revenue estimates for the coming year, the share price will see significant gains unless there is compression in the price-sales metric. If the most bullish case of utilizing the 20 times sales in Microsoft's deal for Yammer, and 75% revenue growth for Jive occurs, Jive's share price would rise to $36.50. Although future deals may fall well short of the ratio paid by Microsoft, which some analysts viewed as excessive, anything remotely close to that level of price appreciation would be enough to give investors something to Jive about.

Disclosure: I am long JIVE.

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