Importance of Network Persistence Plays to This Company's Strengths
Nihar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The digital world is moving over there, and for the most part, it has already moved over there. The rise of the cloud means that less is done locally than ever before. People thought the internet moved the world into a digital age, but thinking back about the recent trends seem more like a digital age. Desktops and laptops are giving way to tablets and phones, with a majority of their services delivered from the network of some company with a data center far away.
Network management is basic yet unnoticed
That places an increased importance on managing networks effectively by maximizing uptime, easing maintenance, and providing security. You would think that the providers of networking hardware would give amazing management solutions, but it seems that a new-ish company called Infoblox (NYSE: BLOX) is providing some of the best network management solutions.
Infoblox is a very new company without much of a history. It provides network management automation software for any company that uses a network, whether for internal use or for offering online services to consumers. It is surprising that investors do not look at Infoblox more, considering that that basic translates into high and consistent demand.
IBM and HP have had their own management solutions, but I see more appeal for investors and potential customers in a company that is smaller. It allows Infoblox to be quicker about responding to customer demands and to remain focused on providing a great product.
Infoblox has a few products, but all of them center around network management automation and network security. Network management is a very vague term, but it basically acts as a software that performs the various tasks that are required to maintain a network. All mid to large networks could use management automation to make sure that the network keeps running.
Infoblox is still small, but has 6,300 customers. A lot of those customers are probably very small, but automation can help reduce the head count while providing a better result. When I went to the Infoblox website, one of the banners mentioned that a security device now had an auto setting with a man leaning back with crossed arms. The implication is that one person can be relaxed about running the security of the network, removing the need for more than one person.
Large technology partners help push the company to the fore
Infoblox works with both Cisco (NASDAQ: CSCO) and VMware (NYSE: VMW). I understand why certain companies would team with Infoblox, because they want to keep their focus on their main business. Juniper is a good example of this. Cisco might offer its own management solution, but might only work with Cisco products and customers that want a solution for a heterogeneous network would need to go with Infoblox, which explains why these companies partner with Infoblox.
Infoblox's product seems to be agnostic to the particular hardware for the most part. Having technology partners include Infoblox products in their offerings is a great way for the company to get noticed by potential customers who might otherwise be unaware of their existence. The technology partners are no slouches as investments either.
VMware is nearing its 52-week low and I am surprised to see it in the $70s. The company was overpriced because it was red hot on the hype. The decline is not surprising, given that the EPS ttm seems to be flattening out. Now that it has had some time to cool off, I think it deserves another look.
VMware is still the leader in virtualization and cloud software, and it is going into software-defined networking. SDN should provide another avenue of great growth for the company and I think ,given the decline, VMware is extremely attractive again.
I feel the same way about Cisco. It has a solid line of product offerings and is expanding into both small cells and software-defined networking. Cisco has been locked in a holding pattern for a decade, and the high teens and low twenties are becoming well worn ground for the stock. I do think the company has the potential for a big rise, considering that it has seen improving earnings.
I have January 2014 calls, and it would not require too much for me to realize a nice return on that as long as the stock moves before fall. With $45 billion in cash the company can do whatever it wants once it figures out what it wants to do. I think the company is being very careful about its next move, but I wish they would make the right choice faster.
Infoblox is profitable according to non-GAAP earnings, but moves slightly into the red with GAAP. The most recent quarter saw the company's revenue increase 32% on a year-over-year basis. The company expects the next quarter to see around 30% YoY growth on the top line.
Gross margin is around 78% and is actually down, because the company now offers some more products that have lower margins. That kind of margin erosion is completely acceptable, because the product base is expanding. Right now, the company is still getting new customers and making sales, but eventually, support renewals will form a major part of the business, and is already forming a nice chunk of revenue.
People who actually know Infoblox will note that I have left a direct competitor, SolarWinds, out of the article. The reason for this is that both companies are relatively unknown, and I think Infoblox should be on watchlists that include Cisco and VMWare as potential investments on the cloud and the heightened importance of networks. Networks facilitate so many important services from networking to productivity software to collaboration tools in the same office that they need to stay up all the time.
I would prefer to go over SolarWinds separately, since it seems to have a broader product base. Infoblox is far newer with more growth potential. It forms a nice addition to Cisco, which is an old giant, and VMware, which is newer but has experienced huge growth.
Nihar Patel has the following options: Long Jan 2014 $30 Calls on Cisco Systems. The Motley Fool recommends Cisco Systems and VMware. The Motley Fool owns shares of VMware. 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!