Cloud Marketing Stocks: Demand Is Growing, but so Is the Competition

Adrian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Cloud marketing, combining traditional marketing software as a service, is a popular concept nowadays. Not only are companies that offer cloud marketing are increasing in number, but some are increasing their valuations as well. A recent example is the acquisition of cloud marketing company ExactTarget (NYSE: ET) by Salesforce.com (NYSE: CRM) for approximately $2.5 billion. This is Salesforce.com's largest acquisition, representing a 52% premium to ExactTarget's closing price before the announcement, and became excellent news for ExactTarget's shareholders.  Meanwhile, just after the announcement Salesforce's stock was off by nearly 5% and shares have seen an 8.48% price decrease so far amidst worries that Salesforce may never recover its premium.

Were these worries justified? Could the emerging cloud marketing market be in trouble in terms of future revenue growth and margins?

The question is very relevant, especially for Salesforce.com since its management is focused on reaching $1 billion in cloud marketing revenue over the next few years and has already spent about $3.5 billion in acquiring cloud marketing companies so far (Radian6 for $336 million in 2011 and Buddy Media for more than $650 million in 2012.)

Cloud marketing 101

Cloud marketing enables companies to outsource corporate software/hardware infrastructure and analysts in order to develop and maintain their marketing plans at a reduced cost.  It can complement traditional marketing and provide additional insights such as real-time analysis and statistics on online product campaigns. This is a must-have nowadays. As companies start paying more attention to online and social marketing, I believe that the demand for cloud marketing solutions will remain solid.

But how do things look like from the supply side? To begin with, this industry has low barriers to entry. Every week, some new startup in the world launches a cloud marketing solution. Dynamic languages like Python and server infrastructure like Hadoop, which are totally free, have made it easy to deploy applications that analyze big data in real time. Furthermore, you don't need much money to have your service online, as most server farms will charge you on a per-usage basis.

And because most of the costs are variable, being big isn't a competitive advantage.

Notice also that you can always make a cloud service product "look different." If you do a quick search on the Internet, you will find that there are dozens of cool names for the same product: an interface that helps you to analyze Facebook & Twitter campaigns in real time so that you can see the effectiveness of your ads. This is an open invitation to start-ups. And the fact that many of these products are achieving impressive sales tells us that clients are looking for different presentations. A bank may have different marketing needs than a cosmetics manufacturer.

All of these reasons contribute to the fragmentation of the cloud services market. From the supply side, therefore, the cloud marketing market looks fiercely competitive. This could lead to low margins for everybody in the long run.

So how are cloud computing companies facing this double reality? Let's look at three examples.

Salesforce.com: The biggest player in cloud marketing

With Social.com, Buddy Media, Radian6 and now ExactTarget in its product portfolio, Salesforce.com is probably the company with the biggest exposure to cloud marketing. Furthermore, because Salesforce.com's traditional focus has been customer relationship management (CRM) software, it is clear that the company envisions a future where companies rely on them for almost everything from email marketing campaigns to booking the sale. The main risk is that, as I mentioned before, being big in the cloud marketing industry is no guarantee of success. I doubt that Salesforce.com will ever have pricing power in this segment. The only way to make profit is to sell massively. This is feasible, but only if Salesforce continues innovating. If a startup comes up with a new algorithm idea or design that is more pleasant to Chief Marketing Officers then it will become a threat, and Salesforce cannot buy them all. 

<img alt="" src="http://media.ycharts.com/charts/9c8782b26d71cbeced1ee70b65fd560b.png" />

Responsys Inc: Being undervalued and a potential acquisition target makes this stock highly attractive

Just like ExactTarget, Responsys (NASDAQ: MKTG) provides a software-as-a-service platform that enables customers to automate marketing campaigns via email or social networks. Even though competition is fierce, however, Responsys may be a good buy as a stock. This is because according to the company's last 10-K, revenues for 2012 were $163 million (for comparison purposes, ExactTarget's revenues were $292 million last year.) Considering that Salesforce.com paid an 8 times multiple on sales for ExactTarget, Responsys would be worth $ 1.3 billion, which more than twice the value of its current market capitalization of $600 million. Some have criticized Salesforce.com for paying a high premium, of course. Responsys is trading at a 3.6 times multiple, however, which suggests that the stock is undervalued.

<img alt="" src="http://media.ycharts.com/charts/9b5639743c07e892e28c8f348dfc3757.png" />

Marketo: Beyond the IPO

Marketo (NASDAQ: MKTO) is a cloud marketing company that targets small businesses. Its flagship product is its Standard Product Marketing platform ($1,995 per month); it offers most of the things that a marketer wants to have access to. Furthermore, it is easy to integrate Marketo's platform with most popular CRM systems including Microsoft Dynamics CRM, Salesforce.com, NetSuite, and SugarCRM.

How good is Marketo as a stock? It's perhaps too early to make any conclusions, as Marketo went public on May 17th. The IPO was relatively successful: it sold 6.1 million shares at $13 a piece.

The current market capitalization of Marketo is approximately $645 million. Considering that in 2012, the company's annual revenue came out $58.4 million (up 81% year-over-year), the current market valuation implies a 11 times multiple. This is not a sign of overvaluation, but I cannot say that shares at cheap at this moment. Therefore, I suggest waiting for more developments in the next two quarterly earnings calls.

<img alt="" src="http://media.ycharts.com/charts/5fff08e142c1a2a73e3da722d4a6c976.png" />

The bottom line

Cloud computing as a business has two different realities. One reality involves a solid and growing demand for more online marketing solutions. The other reality involves a fierce supply-side competition with low barriers to entry. Being big is not a guarantee of success. I found that Responsys is a slightly better investment than its peers, as it may be undervalued and could potentially be acquired by some of the major players in the middle run.

The Motley Fool's chief investment officer has selected his No. 1 stock for the next year. Find out which stock it is in the brand-new free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.

 


Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Salesforce.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus