A Cheap High-Growth Software Company

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

I always have a special appreciation for smaller companies who go up against the big players and win (or at least are competitive). TIBCO Software (NASDAQ: TIBX) is one such company. This business software maker’s competition includes such powerhouses as Oracle (NYSE: ORCL) and Microsoft (NASDAQ: MSFT), who also produce successful business software products. Despite this level of competition, TIBCO has thrived, with revenues about four times what they were a decade ago. Will they continue this trend, or should investors choose one of the larger rivals instead?

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About TIBCO Software

TIBCO produces software products in three main categories: business process management software, business optimization software, and service-oriented architecture (SOA), which are solutions designed to allow seamless interaction between services written for different systems. 

TIBCO is truly a global company, with just about half of its revenues coming from the Americas, and most of the rest coming from Europe, the Middle East, and Africa. The company makes its money from two primary sources: licensing revenue and service/maintenance, both of which are growing; however, the company’s license revenue has been less predictable. 

Cheap or Expensive?

TIBCO trades for around 18.5 times last year’s earnings, which are expected to drop slightly to $1.04 this year, mostly as a result of one-time employee stock-based compensation expenses. However, in 2014 and 2015, earnings are projected to grow to $1.25 and $1.49, respectively, on sales growth of about 9% each year and slightly wider profit margins. With the company’s track record of growth (and profitability), I think the stock looks pretty cheap at the current level, which, by the way, is closer to its 52-week low than its 52-week high.

The Big Boys

As mentioned earlier, the biggest threat to TIBCO is larger software companies, which can generally afford to operate at lower margins and can offer more competitive pricing due to their abilities to bundle services. Let’s take a quick look at the two companies mentioned already to see if our investment dollars would be put to better use with them.

Microsoft: The Biggest and Strongest

Between their Windows operating system and Office applications, which are used to some degree on most PC’s and laptops, Microsoft’s products are widely looked at as “essentials.”  As the world’s largest software company, it is true that you shouldn’t expect quite as much growth as you would from an up-and-comer such as TIBCO, but Microsoft makes up for this lack of growth with stability and income.

Microsoft trades for just 13.2 times forward earnings and is expected to grow its earnings by just over 6% annually going forward. Additionally, the company pays a very nice dividend yield of over 2.6%, and they have raised the payout every year in recent history. Also worth considering is that Microsoft has over $51 billion in net cash on its balance sheet (cash minus debt), which represents more than 17% of their market cap. So, not only does Microsoft have all of the characteristics of a great long-term investment, but they are actually pretty cheap right now.

Oracle: The Enterprise Software King

Oracle is a leading provider of software for enterprises, and also produces some hardware. Oracle is in the process of shifting their business model to software-as-a-service (SaaS) computing, and the company has been acquiring several smaller cloud-computing software companies to help with this transition. Over the past year alone, Oracle has acquired cloud-based companies RightNow ($1.5 billion), Taleo ($1.9 billion), and Eloqua ($900 million).

Oracle may be a good compromise between growth and stability. At 13.8 times current fiscal year earnings (2013), Oracle is projected to grow its earnings by 9% next year and 9.6% in the following year, which is excellent growth for such a low P/E. Oracle, like Microsoft, also has a very significant stockpile of cash, which currently sits at about $17 billion more than the company’s debt.

What to Do?

With the decline in TIBCO’s share price over the past year, and earnings expected to resume growing, now may be a great time to get into a high-growth software company at a nice discount.

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Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Tibco Software. The Motley Fool owns shares of Microsoft and Oracle.. 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!

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