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Keynote Systems (NASDAQ:KEYN) is a technology company that focuses primarily on cloud based services. Their products allow customers to monitor and test their cloud applications on any platform (both mobile and desktop). The key to their business is that their services are largely subscription based which means revenues are more stable and predictable than a similar company that is based completely on sales.

The Good

Keynote's DeviceAnywhere system is expected to gain traction in the upcoming year and is in a prime position as the only such system available commercially. It allows businesses to test their products on the cloud across any (supposedly) device including mobile and desktop. Such a tool that allows testing over multiple platforms simultaneously can save time and allow companies to bring applications to market much faster with fewer flaws.

With cloud computing becoming more and more common, Keynote Systems is a nice value investment for future growth in "the next big thing." What's more is that it's a dividend payer and has absolutely no long-term debt. It's traded as high as 103 times earnings in the past 5 years but currently trades at only 15 times earnings (compared to the industry average of 20 times earnings, which is still reasonable).

The slight weakness in the market overall over the past few weeks is amplified in KEYN, which has a beta of 1.22 according to Morningstar. This provides a good entry point for potential investors. Given the other valuations, this is an extremely cheap stock. Take, for example, the Graham valuation which shows a large upside with a target of $33.13. The PE multiple valuation method gives a fair value of $22.08, which is still an 80% upside. Finally, a Reverse Discounted Cash Flow calculation shows that the market expects 10% growth from the company over the next 5 years which is conservative compared to the 50% growth expected by analysts (according to Reuters).

The 1.69% dividend seems to be secure with a payout ratio of less than 10%. This leaves a lot of cash for management to use in company growth as well as dividend growth for future quarters. In fact, the cash position of the company is stellar compared to its peers. The price-to-cash-flow for KEYN is 4.63 (you pay $4.63 for every $1.00 of free cash flow) compared to the industry average of 16.19 (which means you pay $16.19 for every $1.00 of free cash flow). The other ratios point to a relatively cheap stock also, with a price-to-book of 1.08 compared to an industry average of 6.22.

The Bad

Because of the headlines that cloud technology has been making for the past year or so, more and more players are turning up as competition for KEYN. Compuware (NASDAQ:CPWR) provides some services that are very similar to that of Keynote, though with a slightly different approach to business. Rather than packaging all services into one platform like DeviceAnywhere, Compuware gives their customers the choice to purchase only what they need.

While not always a bad sign, it seems that certain Keynote insiders have been dumping their shares in large amounts. The net insider ownership in the trailing twelve months is still up 30% according to Morningstar, however there are three key insiders who have sold more than 50% of their positions. Martin Loehlein has removed 100% of his position in the past twelve months. The reason behind this could just be to cash in on their investments but it's worth some consideration.

Finally, technicals all point down for Keynote. Technicals are more of a short-term indicator while fundamentals are long-term. In the short term, then, it seems like Keynote is headed down unless earnings are a major surprise. The Ultimate Oscillator and RSI are both in solid downtrend territory but not in oversold territory. The MACD is below the signal line and diverging while the price is below the 25, 50, and 100 day exponential moving averages.

What Investors Should Expect

Investors should expect Keynote to move slightly lower based on technicals unless it gets a bail out from earnings. In the long term, Keynote has a healthy upside considering their subscription based business and the potential of cloud computing. Valuations and fundamentals point to at-least an 50% upside and that's before collecting the dividend, which has plenty of room to grow. Investors will like that Keynote has no long-term debt and has a lot of cash to play with.

Source: A Dividend Payer Set To Take Control Of Cloud Computing Services