The massive selloff in cloud companies should be no surprise. For the most part, the past few years saw a huge bull move. So a correction was inevitable — perhaps even healthy.
Given this, might now be a good time to take a look at some of the names being affected? I think so. Keep in mind that top-notch cloud companies should continue to benefit from the secular trend away from traditional on-premise software. According to IHS, enterprise spending on cloud computing software will surge from $78 billion in 2011 to a whopping $235 billion by 2017.
However, investors should still be cautious. Let’s face it, there are a variety of cloud companies that could be vulnerable to disruption, such as the ad tech space. Competition is intense, with mega players like Apple (AAPL) and Google (GOOG) putting enormous pressure on competitors. Oh, and Facebook (FB) and Twitter (TWTR) have recently launched their own offerings. (I noted the impact of all this in a post on Millennial Media (MM), which has imploded.)
OK, so what are some of the cloud companies that look attractive and have good long-term prospects? Well, here’s a look:
Cloud Companies to Buy: NetSuite (N)
NetSuite (N) is one of the pioneers among cloud companies (it was founded in the late 1990s). Then again, the company has needed lots of time to build mission-critical software for ERP (enterprise resource planning) requirements. While there is competition — such as Workday (WDAY) — it is still fairly limited. And this will likely remain the case because of complexities of the market.
No doubt, N stock has benefited from the company’s ability to post solid growth on a consistent basis. For example, the company has generated 30% revenue growth on a year-over-year basis for the past seven consecutive quarters. It certainly helps that the company has a full-blown suite of applications and also allows for lots of customization, which is critical for enterprises.
And the valuation of N stock is reasonable right now. NetSuite is currently trading at 12 times sales while WDAY’s multiple is still at a nose-bleed 26.
Cloud Companies to Buy: ServiceNow (NOW)
ServiceNow (NOW) operates a platform that automates and manages information technology processes, such as the help desk. By being cloud-based, the technology allows customers to build innovative apps, which has resulted in strong customer loyalty.
As with many other hot cloud companies, NOW stock has been a roller coaster lately. But this isn’t an issue for the company’s CEO, Frank Slootman. I met with Slootman recently, and he told me that ServiceNow could be instantly profitable if he dialed down growth. He said that would be a mistake, though, because the market opportunity is massive. His competition is mostly made up of legacy operators like BMC (BMC) and Hewlett-Packard (HPQ).
In the latest quarter, ServiceNow saw a 62% spike in revenues to$139 million. There were also nine new transactions with annual contract values in excess of $1 million and one deal was more than $10 million. ServiceNow is also a big generator of cash flows, which came to $24.2 million in Q1.
Cloud Companies to Buy: Cornerstone OnDemand (CSOD)
Compared to other cloud companies, Cornerstone OnDemand (CSOD) often gets overlooked. But the company is actually another pioneer — and has built a solid business in the category for talent management, such helps with recruiting, hiring and onboarding.
True, CSOD has competition. But most of the players are mega companies like Oracle (ORCL) and IBM (IBM), which are far from nimble. Besides, the company has the advantage of being solely focused on talent management and its platform is available for companies of all sizes.
And yes, CSOD has been growing at a nice pace. In the latest quarter, revenues jumped by 52% to $57.4 million. But the strength should continue for some time. Consider that the company believes its global market opportunity is about 400 million seats. As of now, the base for the company is a mere 14.5 million.
CSOD stock is currently trading at a fair valuation for cloud companies, with a price-to-sales ratio of 9.
Cloud Companies to Buy: Fleetmatics (FLTX)
When it comes to cloud companies, Fleetmatics (FLTX) stock is downright cheap. The stock trades at only five times sales, and the forward price-to-earnings ratio is 24.
Founded about 10 years ago, Fleetmatics is now a top player for fleet management solutions, with a focus on small- and medium-size businesses. The technology helps improve fuel usage and speed as well as reduces driver risks. In Q1, FLTX grew its revenues by 35% to $51.9 million and operating cash flows came to a juicy $20.3 million. The company has about 472,000 active subscriptions.
But FLTX continues to find new opportunities growth, especially in foreign markets. Some of the recent expansion efforts include moves in Mexico, Mainland Europe and Australia.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.