Last year, I predicted that old tech would hit the shopping aisles to get a toehold in cloud computing. I suggested they would acquire the likes of Taleo (TLEO), Kenexa (KNXA), Cornerstone OnDemand (CSOD), NetSuite (N), and The Ultimate Software (ULTI), all software-as-a-service (SAAS) companies.
In February, Oracle (ORCL) bought Taleo for $1.9 billion.
Yesterday, IBM (IBM) purchased Kenexa for $1.3 billion, at a rich 41% premium. Kenexa has a 3-year average revenue growth of 12% and no earnings. It's experienced sales acceleration this year.
With the Kenexa buy, only three of my SAAS targets are left.
I don't think tech is going to stop. Large enterprise software firms want to offer their customers cloud-based services as their old model of selling software has become outmoded. Big tech is gobbling up software-as-a-service. Last year, Oracle bought RightNow; SAP (SAP) swallowed SuccessFactors; IBM devoured DemandTech; HP (HPQ) ate Hiflex. It's been tit-for-tat. You buy one. Now it's my turn.
The Goods Remaining (Some are tastier than others.):
NetSuite - Market cap $3.9 billion, no earnings, 3-Year average growth rate 15%.
The Ultimate Software - Market cap $2.6 billion, PE 400, 3-Year average growth rate 15%
Cornerstone OnDemand - Market cap $1.4 billion, no earnings, 3-Year average growth rate 55%.
There's also Saba Software (SABA) with a much smaller $250 million market cap. However, it has a slower 3-Year revenue growth of only 3%, which makes it less appetizing.
The pick of the litter: Cornerstone OnDemand. Last quarter, it added 120 new clients, bringing its client base to over 1000 organizations. The company has accelerating revenue growth and its quarterly sales were 78% higher year over year.
I'd suggest buying Cornerstone OnDemand and possibly NetSuite and Ultimate before big tech acquires them. So far, enterprise software has been paying large premiums for the SAAS firms. Next year, I'll revisit the list. I suspect a couple of the SAAS companies will be no longer independent.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.