Since coming public in late July, Tangoe (NASDAQ:TNGO) has been on fire, with its stock soaring more than 80% to above $22. Of course, just like anything red-hot, investors should take care before handling — there’s already some signs the momentum could taper off.
Tangoe is a developer of software called communications lifecycle management, or CLM. It helps with all the key aspects of a company’s communications assets like planning, sourcing, procurement, usage, accounting and device management.
Tangoe’s solution is cloud-based, which makes it easier to update the software and provide better analytics. But the main benefit is that it helps to substantially reduce costs, such as by dealing with billing errors, avoiding mobile overages and so on.
So far, business has been good. In the latest quarterly report, revenues spiked by 53% to $34.1 million and adjusted earnings came to $3.4 million, or 9 cents a share — beating Wall Street estimates for revenues of $33 million and profits of 8 cents.
But while the report stood out, investors should remain cautious. Tangoe’s valuation is awfully frothy, coming to more than 6 times sales and 76 times EBITDA.
Meanwhile, Tangoe has a few headwinds to deal with.
First of all, the company has tough competition that includes major players like IBM (NYSE:IBM), Ariba (NASDAQ:ARBA), and SAP (NYSE:SAP). Keep in mind that companies often have their own in-house solutions to manage their communications assets.
But perhaps the biggest problem could be the sluggish global economy. In such an environment, it certainly gets tougher to sell software solutions (here’s a piece I did on the possible impact on the cloud space). CLM might be nice, but is it really a high-priority item for businesses closely eying the bottom line? Probably not.
No doubt, Tangoe has a strong platform and has been able to continue a nice growth path. But if the economy continues to lag, things could slow down — and TNGO shares would be in position for a retreat.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”, “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.