It’s been harsh for tech stocks lately. This week there were six initial public offerings (IPOs) — this week — that fell below their offerings prices. This is a sure sign of Wall Street going risk-off. Yes, there really does look like a rotation is going on, especially as interest rates have continued to increase.
But as valuations get more attractive, this could provide some interesting acquisition opportunities for larger companies. Besides, dealmaking can be a quick way to move into emerging categories – so as to improve growth and competitiveness.
OK then, so what are some potential merger and acquisition (M&A) targets for tech stocks? Well, let’s take a look at seven:
- Rackspace Technology (NASDAQ:RXT)
- Box (NYSE:BOX)
- Sumo Logic (NASDAQ:SUMO)
- Rimini Street (NASDAQ:RMNI)
- Yext (NYSE:YEXT)
- Secureworks (NASDAQ:SCWX)
- Progress Software (NASDAQ:PRGS)
Tech Stocks: Rackspace Technology (RXT)
Rackspace Technology, which is a provider of cloud tools and services, pulled off its IPO back in August. But the gains have been modest, with RXT stock up about 24% year-to-date.
Yet the company does look positioned for long-term growth. As companies look to move towards the cloud, there is a growing need for a partner like Rackspace, which understands how to successfully deploy the technology. It is also key that the company provides a multi-cloud strategy. This is attractive for customers because they do not want to be locked into a system.
During the past nine years, Rackspace has invested more than $1 billion in its cloud infrastructure. There have also been the development of proprietary tools, such as for AI (Artificial Intelligence), ML (Machine Learning) and IoT (Internet-of-Things).
In terms of the valuation, it is reasonable, considering shares are trading at one and a half times sales.
Box got its start back in 2005 and was an early pioneer of cloud-native storage. The company would then transition to being a full-blown content management platform.
The result is that Box has become a leader in the cloud enterprise market, with $770.8 million in revenues during fiscal 2021 and cash flows from operations at $196.8 million. There are currently over 100,000 paying customers, which include General Electric (NYSE:GE), Morgan Stanley (NYSE:MS) and AstraZeneca (NASDAQ:AZN).
But there is a nagging problem: the revenue growth has been tepid. After all, the market has long sales cycles and it can be tough to get large companies to change their existing systems.
However, Box is innovating its platform to increase growth. Perhaps the biggest move is to provide e-signatures for contracts. This is certainly synergistic with the platform – but also a lucrative business. Just look at the huge success of DocuSign (NASDAQ:DOCU).
Something else to consider: It looks like Box is exploring the sale of the company. This is primarily due to the pressure from activist investor Starboard Value, which has a 7.5% equity stake in BOX stock.
Sumo Logic (SUMO)
Even though tech stocks have seen many strong IPOs, Sumo Logic has been left out of the party. The shares are near their initial offering price – and are off about 56% from their high.
But Wall Street should not give up on Sumo Logic. The company is the pioneer of an emerging tech category called continuous intelligence. This is where a cloud system ingests enormous amounts of data to make better decisions in real-time.
So far, Sumo has focused on the cybersecurity segment. For example, the company recently announced the acquisition of DFLabs S.p.A., which is a leader in SOAR (security orchestration, automation and response) technology. Its tools should see strong buy-in from existing Sumo Logic customers.
Yet the company’s technology has applications beyond security, say for IoT. According to International Data Corporation, the market opportunity is about $55.1 billion for Sumo Logic.
As for the valuation on SUMO stock, it’s relatively low. It’s currently trading at four times sales.
Rimini Street (RMNI)
Support services is a massive business. But they are usually provided by the vendor.
Yet for Rimini Street, the company believes it can do a better job. It has built systems to provide support for software from companies like Oracle (NYSE:ORCL), SAP (NYSE:SAP), IBM (NYSE:IBM), Microsoft (NASDAQ:MSFT) and Salesforce.com (NYSE:CRM).
Rimini Street has the advantage of being focused on customer needs and requirements. The company has also invested in building automation technologies to streamline the services. For example, it has built an AI technology that greatly reduces client case resolution times.
The business is definitely profitable. In the latest quarter, operating cash flows spiked by 107% to $42.1 million. There are close to 2,500 customers.
RMNI stock is also trading at a reasonable level, with the the shares at about two times sales.
Data is often called the “oil” of the modern economy. It’s what drives technologies like AI and machine learning. Oh, and it could be a major attraction for an acquisition.
So a company in the data space that could be a target is Yext. Founded in 2006, the company has created a proprietary knowledge graph that has over 475 million facts, up 71% on a year-over-year basis. A key source of data is actually from customers.
In terms of the Yext platform, it helps customers benefit from more sophisticated online searches. With the growth of services like Siri and Alex, there has been a change towards queries that are more complex. In fact, the goal for Yext is to disrupt the traditional keyword-based search market, which is massive.
What about the valuation? The shares of YEXT currently trade about five times revenues.
Cybersecurity remains a top-of-mind priority for executives. The risks from hackers – including nation states – keeps getting worse.
For Secureworks, the company has been building systems since 2000 to deal with those problems. But the technologies were on-premise and not necessarily flexible.
This is why Secureworks has aggressively moved toward the cloud. And the results are encouraging. The company’s cloud-based Taegis system has attracted close to 400 customers and the ARR (Annual Recurring Revenue) growth was 266% to $55 million since the start of the fiscal year. The system has both threat hunting capabilities and sophisticated incident response.
The valuation is also reasonable on SCWX stock. The multiple is about two times sales.
Progress Software (PRGS)
Progress Software is a pioneer of the software industry. Note that the company was started in 1981.
Since then, Progress Software has developed a portfolio of tools that help with categories like DevOps, UI/UX design, secure file transfer, infrastructure monitoring and app development. A big part of the strategy has been to acquire software operators.
The company has over 100,000 enterprise customers that run their mission-critical operations with Progress software. There is also a rich ecosystem of 1,700 software companies that use the technology and a developer community of 3 million.
Such capabilities would certainly be attractive to an acquire. The company also has strong cash flow generation. During the past fiscal year, the cash flows from operations were $144.8 million, up from $128.5 million.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article except for long positions in Rackspace and Box.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.