SolarWinds: a Growth Story at the Heart of the Cloud
Erick is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I'm always looking at various stock screens for fast growing companies in good growth sectors. A company that has grabbed my attention is SolarWinds (NYSE: SWI), a midcap company based in Austin, TX, that provides IT departments with software to monitor their networks and servers. SolarWinds' philosophy is to take existing network needs and then sell software to IT professionals that meet those needs at a much cheaper price than the the big boys. By being in tune with their customers they can simplify the networks that help run the cloud.
One of their biggest customers is the Federal government, and this produces some accounting headaches, as the company's receivables can be slightly out of whack because the government sometimes pay late. As their CEO explained in their last conference call, everything's good as long as they don't pay more than 3 months late or in the same quarter (I'm paraphrasing here).
SolarWinds provides security software for firewalls and monitoring software for networks in order to keep things running smoothly, a good thing given the recent press reports of cloud failures by Amazon (NASDAQ: AMZN). Amazon is THE big player in the cloud, but its valuation is astronomical given its main business as a retailer, in other words, it is not a pure play cloud company. SolarWinds, on the other hand, is right in the middle of cloud infrastructure with its software offerings.
SolarWinds was recently named by Forbes as its #1 small company in America. This designation is deserved as it grows revenues quickly and is able to hold its own against larger competitors, such as IBM (NYSE: IBM). IBM has been concentrating on cloud management services, and this has provided one of its main areas of growth in the past year.
Being smaller, SolarWinds can undercut the pricing IBM offers, and can be nimbler in providing the solutions its clients demand. It provides the functionality needed for the IT department clients without some of the frills and legacy costs.
Revenues have been growing at greater than 30% a year for the past 5 years. The stock screens pick it up because of its stock appreciation and growth in earnings over the last year. The company has a lot of room to grow, with a market capitalization under $4 billion, especially given the high growth area in cloud computing services.
The stock is by no means cheap, with a P/E ratio hovering over 50; but compared to another darling of the cloud, Rackspace Holdings (NYSE: RAX), that looks positively on sale. Although Rackspace is more in the middle of the cloud revolution with its direct hosting services, the growth at SolarWinds has been just as consistent.
SolarWinds has recently backed off a 52-week high, and this may represent a chance to nab a high growth stock at a somewhat reasonable price.
In summary, for my SWOT analysis:
Strengths: Involved in high growth area, good management, excellent reviews from IT professionals
Weaknesses: dependence on Federal contracts, small company compared to IBM and others competing in the same space
Opportunities: expansion into emerging markets and taking share away from the big boys by undercutting their prices and simplifying software
Threats: Competitors deciding to give up their fat margins in order to squelch SolarWinds
xerohype has positions in SWI, AMZN and RAX. The Motley Fool owns shares of Amazon.com and International Business Machines. Motley Fool newsletter services recommend Amazon.com, International Business Machines, and Rackspace Hosting. 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.If you have questions about this post or the Fool’s blog network, click here for information.