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Published: September 27, 2010
One of the mega growth companies of the
past few years is Salesforce.com (NYSE : CRM). Since
2008, sales have spiked from $748.7 million to $1.3 billion. And
investors have piled into the stock, which has gone from $34 to
nearly $120 since early 2009.
Salesforce.com builds software to help companies improve the
results of their sales teams. While this is not new, the company
has taken different approach to delivering its solutions through
something known as "cloud-computing." And while much of the
gains to be had in this stock have already been made, the good
news is that there are other stocks in the sector that are also
growing at a rapid clip and should provide nice returns for
investors.
To understand cloud-computing, it is important to take a look at
the traditional approach to business software. Known as
on-premise software, this involves installing complex
applications on a company's servers. This means there are large
expenses for information technology (IT) systems as well as
technical support staff and outside consultants.
On-premise software is far from cheap. A company must pay an
upfront licensing fee and then ongoing maintenance fees. So if a
company implements an enterprise resource planning (ERP) system
-- which handles things like the general ledger, inventory,
payroll, and so on -- the costs can easily amount to several
million dollars.
But cloud computing takes a much different approach. First of
all, the software is typically installed on the software
provider's own servers. The customer simply accesses the
software via the Internet. The result is that it is much easier
to update the application and there is also no need to invest
huge amounts of money on an IT infrastructure.
Even the
business model is different. For example, cloud-computing
providers charge an ongoing subscription fee, which is usually
based on the number of users. For the most part, this is cheaper
than the licensing/maintenance approach.
All in all, cloud-computing looks like a disruptive technology,
and the market opportunity is enormous. Consider that the
International Data Corporation (IDC) pegs the cloud computing
market at $16 billion this year and forecasts it to reach $56
billion by 2014.
So what are some top cloud-computing operators that are
attractive investment opportunities? Here's a look at three:
1. SuccessFactors (Nasdaq: SFSF) develops business
execution software. That is, it helps communicate key strategies
throughout an organization and measure the ongoing results.
Since 2008, revenue has grown about +27%
each year. For the current year, SuccessFactors is expected to
post revenue of $198 million to $200 million and has actually
raised guidance twice. More than half of new revenue comes from
existing customers, which shows that the software is providing a
strong value proposition. SuccessFactors also continues to
invest heavily in its technology and has purchased several
companies. The company estimates its market opportunity at a
whopping $36 billion. It helps that the company's software can
scale from small businesses to global enterprises.
2. NetSuite (NYSE: N) develops an ERP system for the
cloud. While the market is dominated by large companies like
SAP (NYSE: SAP), Oracle (Nasdaq: ORCL) and
Microsoft (Nasdaq: MSFT), they have been slow to move to the
cloud.
No doubt, this has been a boon for NetSuite. In the latest
quarter, revenue increased +17% to $47.1 million, which was
above the $45.3 million guidance. A driver for the company is
its OneWorld system. This is focused on the needs of global
customers who are willing to pay premium prices for a strong ERP
system.
As a sign of the growth prospects, NetSuite said it will be
boosting expenditures on its platform and also increasing the
ranks of its sales team.
3. Taleo (Nasdaq: TLEO) develops a cloud-computing
offering for talent management applications, helping with things
like recruiting, management and tracking of employees.
Even with a prolonged high rate of unemployment, Taleo continues
to grow its business. In the latest quarter, revenue increased
+14.6%. As the economy comes back, expect the growth rate to
ramp up even more.
Taleo has also made several smart acquisitions to bolster its
offerings. For example, the company recently shelled out $125
million for Learn.com, which is a top provider of learning
management tools for employers. With the deal, Taleo was able to
pick-up more than 500 customers.
Action to Take --> While
these three cloud operators are top performers, I would give
priority to NetSuite as an investment. The company has a
comprehensive solution, which has taken more than 10 years to
build, and the barriers to entry are significant. As NetSuite
goes up-market in terms of targeting customers, there should be
a nice boost in revenue, which should drive significant returns
for investors.
-- Tom Taulli
Contributor
StreetAuthority |
