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  • eGain Communications: A Cloud Stock With 84% Upside 0 comments
    Jul 22, 2011 6:21 AM | about stocks: RNOW, LPSN, ZAGG, YHOO

    Over the past twelve months, two of the best performing cloud plays have been Rightnow (NASDAQ:RNOW) and Liveperson (NASDAQ:LPSN). Both have had impressive runs, with each doubling in price since last summer. While the long-term future for RNOW and LPSN looks bright, one has to wonder how much upside remains for their stocks, with each trading for 4-5X sales; on an earnings basis, LPSN trades for a 35X multiple and RNOW trades for a 53X multiple. By all measures, both seem pricey to us. This brings us to eGain Communications, one of the original cloud plays from the 90’s that has been flying under the radar of most investors for the past decade. Our thesis for investing in eGain (NASDAQ:EGAN) is quite simple: EGAN’s current valuation does not reflect the accelerating fundamentals of the company. In comparison to both LPSN and RNOW, EGAN’s stock is cheap. As new investors discover the story in the coming quarters, this valuation disconnect will narrow, resulting in a much higher stock price from current levels.

    Earlier this week the company pre-announced another very upbeat quarter. Here is what eGain had to say about the quarter:

    • The company currently expects to report total revenue between $12.0 million and $12.5 million for the fourth quarter ending June 30, 2011, an increase of 82% to 89% from the comparable year-ago quarter.
    • The company currently expects to report new hosting and license bookings of approximately $6.7 million, an increase of 139% from the comparable year-ago quarter. The company currently expects to report earnings from operations between $1.5 million and $2.0 million for the fourth quarter, compared to a loss from operations of $1.2 million in the comparable year-ago quarter.

    Total revenue is now expected to increase by 45% to 47% to $43.5-$44 million for the fiscal year ending June 30, 2011. Perhaps the most compelling metric for the company is the acceleration they have seen in new hosting and license bookings, which increased 82% from the prior year to $23.9 million. For the year, earnings will rise by 700% to $8.8M-$$9.3M, equating to $.36 a share.

    Looking ahead, the company seems poised for further growth:

    “Our strong preliminary revenue for the fiscal fourth quarter was driven by several license transactions signed during the quarter, including the recently announced agreement with Canon U.S.A. to deply our eGain 10 software suite for multichannel customer service,” said Ashu Roy, eGain CEO. “These recent customer wins and our bookings growth for the fiscal year demonstrate the strong business momentum we are generating as we enter fiscal 2012.

    Earlier this year, CRM commended eGain for its comprehensive Social Experience Suite, calling the company “The One-Stop Shop” for customer interaction and knowledge management. By empowering contact agents and community managers to respond to customer’s needs across both traditional and social channels, eGain® Social Experience Suite™ can be integrated with Facebook, Twitter, and Web search. Perhaps this is why Vodafone, Canon, Avis and Hertz all signed big license agreements with eGain last year?

    CRM
    also highlighted another product offering, eGain® Multisearch™, describing it as an “all-in-one search solution that is designed to dramatically improve the user experience.” In the eyes of Esteban Kolsky, principal and founder of CRM intelligence and strategy firm ThinkJar, “eGain has evolved its product to include a new model of search that allows it to deliver better service to users. They can find information faster and easier and with a better overall experience.”

    Hoping to seize upon its growing momentum, eGain is currently in the process of doubling its sales force. Although it will take a few quarters before these new sales reps will make any contribution to eGain’s top-line, we feel that these long-term investments are prudent and a wise move on management’s part. Ultimately these new reps should allow the company to accelerate its growth in the back half of its new fiscal year which just began on July 1st, giving investors an important catalyst to look forward to early next year.

    Investors have certainly caught wind of the story. The stock has tripled since the beginning of the year. We see additional upside with the stock trading at an 11x P/E multiple. In the near-term, we envision the stock moving above $4. Such a move would open the door to an important Nasdaq up-listing, a big catalyst that will allow new institutional investors to move into the name.

    Once the company is able to list its shares on the Nasdaq we would expect analyst coverage to follow thereafter. In a certain sense, eGain reminds us of Interclick (ICLK) and ZAGG before they got up-listed to the Nasdaq over the past two years. As soon as both companies moved to the Nasdaq, new analyst coverage brought new institutional investors into the story, ultimately leading to much higher prices for both stocks. We expect the same pattern to occur with eGain.

    As analysts model $60 million in sales for the company on a forward basis, we envision eGain trending toward $7 by the first quarter of next year. At $7, the stock would trade for a 3X sales multiple based on a fully diluted share count of 26 million shares. While certainly not cheap, we view a 3x forward sales multiple as more than reasonable for a company that is rapidly expanding market share and which could very well be on its way toward $100 million in sales and $1 in earnings in a few years. As such, we remain patient and steady buyers of eGain shares on pullbacks to the low-to-mid $3’s.



    Disclosure: I am long EGAN.
    Themes: Cloud software plays Stocks: RNOW, LPSN, ZAGG, YHOO
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