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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.

SAP, IBM, Oracle, and Salesforce.com (CRM) are on a feeding frenzy. Even HP might bite on a small SAAS play - though its new CEO promises to hold off on billion dollar takeovers.

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 (OTC: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.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

Source: IBM Bought Kenexa: Who's Next?