Are These True Cloud Or Cloud-Washing Companies?

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

Recently, cloud computing companies have received special interest from the Street as the smart analysts try to separate the true cloud companies from companies accused of “cloud washing.” In this respect, some stocks have received bearish opinions from most of the analysts. Following discussions gives a flavor of why this bearish point of view might not be the right one:

NetSuite (NYSE: N)

Investment Thesis: The long-term market opportunity lies ahead for NetSuite and NetSuite, definitely, seems to be a unique asset that holds significant competitive advantages. The average lifespan of an application package extends over 10-15 years, and the last major re-platforming cycle occurred in the late 1990s to early 2001. As companies look for new and/or modernized applications, which are expected to gain momentum in 2012 and continue through 2015 (if not beyond), two-tier ERP systems will increasingly gain popularity among businesses worldwide, which should continue to benefit NetSuite OneWorld (according to NetSuite, it is the world’s most deployed ERP solution for global businesses.

Contrarian Idea: The market has not been appreciative of the two-tier ERP system that NetSuite has recently launched. The two-tier ERP systems will increasingly gain popularity among businesses worldwide, which should continue to drive bookings growth for NetSuite. The two tier ERP system is more cost-effective, easier to deploy, and more tailored to meet the needs of a business. Currently, only seven analysts at the Street recommend NetSuite as a buy. Whereas, 15 analysts suggest a hold position in the stock and only two recommend to sell the stock.

Recently, FBN Securities published a 146 pager report that mentioned the future outperforming, sector performing and underperforming stocks in the cloud computing space. Apart from NetSuite, the investment advisory company likes Citrix Systems (NASDAQ: CTXS),, ServiceNow, Equinix and Akamai Technologies in this space.

FBN Securities has assigned a target price of $85 for Citrix Systems (means an upside of 18% from current levels). The company’s “XenDesktop product” which is now around 60% of all “Mobile & Desktop” revenue for the company, is considered to be the key in driving incremental revenues for the company. For those who don’t know about this product, XenDesktop is a desktop virtualization solution that transforms desktops and applications into a secure on-demand service available to any user, anywhere, on any device.

Key Catalysts for NetSuite: Earnings release seems to be the only near-term key catalyst. The Street expects NetSuite to report March quarter results in the last week of April.

Valuation: $85 target price for NetSuite implies NTM (Next Twelve Months) EV/UFCF (Unlevered FCF) multiple of 119.2x and a NTM EV/Revenue multiple of 14.5x. This target price means an upside of 18% from current levels.

Concur Technologies (NASDAQ: CNQR)

Investment Thesis: Concur is the leading provider of Travel & Expense management software; the large amount of past investment spending is now positively affecting Concur’s organic growth rate. Incremental growth opportunities in underpenetrated geographies and solid, consistent bookings give us an indication that the company and shares will meet / beat investor expectations through 2013.

Contrarian idea: The consensus is missing what the US GSA (General Services Administration) contract could contribute in F2014/F2015. GSA was a $1.4 billion contract awarded to Concur in June, last year, in which the company is expected to provide the next generation E-Gov Travel Services. An analysis that measures the potential revenue contribution from GSA over the next 2-3 years shows that backing out GSA’s contribution, the Street is modeling a significant deceleration in the company’s private enterprise business, which is not likely to occur given that the last 4-6 quarters of bookings and, as qualitatively discussed by management, continues to be above the 25% revenue growth they guided to in F2013. The near-term risk is Concur ramping up all the large deployments that were signed in F2012.

Key Catalysts: Concur will host its first-ever analyst day on Tuesday, April 16 at its user conference, Fusion.

Valuation: The target price of $83 (means an upside of 22% from current levels) is based on a blended average using 50% of discounted cash flow (DCF) valuation and 50% relative comparable multiples of its peers. This valuation is supported by a 7.5 times enterprise value to estimated sales multiple using the calendar 2013 sales estimate (EV/R). The EV/R is higher than industry average multiples due to the company's better-than-industry-average revenue growth and margins.

Foolish Bottom-Line

NetSuite and Concur, both stocks have not received as many favorable comments from the Street as they deserved. Both of them are set to fly high given their innovative product offerings and attractive valuations. 

Zain Abbas has no position in any stocks mentioned. The Motley Fool recommends Netsuite. 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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