Is This Stock a Good Buy After a Recent Correction?

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

LivePerson’s (NASDAQ: LPSN) shares plunged sharply after it reported disappointing first-quarter results. Management also lowered its guidance for the full financial year. I believe that this panic reaction among investors gives the rest of us a chance to buy this stock as an upward correction is likely in its share price. The company has added data analytics to its product portfolio, which will help it to customize and target the potential customer, thereby reducing both cost and effort on its part. This new feature will help the company reduce its churn rate and also bring in new customers. At the current market capitalization of $510 million, the company is also a potential target for takeover by larger firms. In this article, I am discussing some of the key points that make LivePerson a good buy.

Growth potential

New product development will help gain new customers and increase revenue

LivePerson is in chat services, voice and content delivery. But it is moving from being just a chat service provider to becoming a real-time data intelligence platform provider. It has potential to generate more average revenue per customer (ARPU) as well as attract new customers from its real-time data intelligence platform. The company can now cross-sell its other services to the existing customers, thereby increasing its ARPU, which will help improve its margins. Generally, cross-selling requires less marketing effort and cost is substantially reduced.

Geographical expansion will increase revenue in the coming year:

The company is focused on increasing its global footprint. To achieve this, it has increased its investment in sales and support personnel in Australia, Asia Pacific, the UK and parts of Europe. LivePerson is also acquiring data-analytics companies in specific regions to increase its footprint internationally. Last year, it acquired Engage, an Australian company which is a cloud-based, customer-contact service provider. This will help it make its presence in the Asia Pacific region. I believe the selective acquisition in the emerging markets will help increase its revenue.

Capital expenditures will help build long-term sustainable revenue

LivePerson has been investing to build its expertise in new products and has been acquiring companies. With strong cash on its balance sheet, selectively targeting the companies to acquire is possible. With no debt, the added revenue and profit will increase the EPS. I believe this will have some impact on both the EPS and EBITDA in the coming quarters, but this investment will positively impact its revenue and EBITDA from fiscal 2014.

Recent events make the company good target for acquisition

At current market value, the company is a potential candidate for acquisition from any large company in the technology sector. Companies like SAP, Oracle and IBM have their plans to increase cloud services and may acquire companies in this domain. LivePerson, with its current market cap of $510 million, looks a prospective candidate for acquisition.

Peer analysis

Responsys (NASDAQ: MKTG) and Constant Contact (NASDAQ: CTCT) are two other software-as-a-service (SaaS) players which cater to the marketing needs of small and medium businesses.

Responsys is one of the leaders in SaaS-based marketing solution providers. The company reported a strong first quarter, beating the estimates with an increase of 23% in revenue year over year, and EPS of 0.7% against the consensus estimate of 21% for revenue and 0.5% for EPS. We believe with strong product offerings and ability to have a subscription dollar-retention rate of above 100%, the company is poised to increase its revenue and EPS in the coming quarter. Other factors for being bullish are strong possibility of the company being taken over by the likes of IBM and Oracle who have been aggressively making acquisitions to increase their cloud service offering.

Constant Contact is the other company which posted strong first-quarter 2013 results. The company beat the consensus estimate for both revenue and EBITDA margin. The company has shown consistent growth in new customer additions and ARPU in the last few years. I believe increasing its portfolio of new products and expanding globally will increase its new customers and ARPU in coming quarters. Recently we have seen consolidation in the cloud-based application providers. We believe that further consolidation will take place, which makes Constant Contact a candidate for takeover. Hence, I am optimistic about the company.

Conclusion

LivePerson reported a subdued last quarter and also downgraded its guidance for 2013, based on client attrition. We believe that the company will keep on investing in new platforms and international expansion, which will lower its EPS in coming quarters. In the long term, the investment will help the company attract new customers and increase its top line. With the market cap down to around $500 million, the company is also a potential takeover candidate by the larger firms in the industry. At the current market price, the stock can see upward movement with high probability of acquisition.

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Lalit Kumar has no position in any stocks mentioned. The Motley Fool recommends LivePerson. 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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