MI have gone gaga on software shares
since 2013, when Satya Nadella redefined Microsoft – and tripled the valuation
of the Evil Empire of Redmond in the next five years. True, Microsoft was the
best Big Tech performer of 2018, an annus horribilis for the best and brightest
of Silicon Valley. The world’s most exciting software shares were slammed by
the bearish bloodbath on NASDAQ. However, when the going gets tough, the tough
get going – or at least begin nibble at a sector that now trades at a 5.8 times
forward enterprise value to revenue multiple, down a third in 2018.
Amid the carnage in NASDAQ, I flee into
the safe embrace of global software’s top enchilada which unsurprisingly
happens to be Microsoft. I would take advantage of the spike in the Volatility
Index to sell six month put options on Microsoft where the worst possible
scenario is to own its shares at 92. Azure’s stellar growth engine reignites
the franchise beyond the Office/Windows cash cows. Xbox has finally got its act
together. The transition to the subscription model has been a fabulous success.
Apple’s iPhone/China woes mean Microsoft is the most valuable business on
earth. Azure’s market share gap with Amazon Web Services has shrunk on faster relative
growth metrics. The new product development cycle has accelerated.
Collaboration software/Office 365 is on a roll. My buy/sell range on Microsoft
is 92 – 120.
Dropbox, a San Fran startup that
provides file transfer, storage and collaboration solutions to 11 million
paying customers (with 500 million registered users) went public in a March
2018 IPO at 21. The shares peaked at 43 last June and have plunged down to 21
in the NASDAQ carnage (and accelerated lockup expiration) even though the firm
has exhibited viral growth in users/clients in highly networked communities
(universities, tech workers, media etc.) via “word of mouth (WOM) marketing.
This has created a virtual cycle of low customer acquisitions costs,
self-licking ice cream cone growth metrics and an innovative enterprise
collaboration software product suite. Dropbox’s shingled magnetic recording
technology was a beauty and clear user interface make it a real jewel in the
subscription based software space.
Dropbox is now available at its IPO
price. Yummy. I believe this puppy is an embryonic baby AWS that has to be a credible
takeover bait for Google, with its $102 billion in cash and pathetic cloud
market share. Is this a potential double bagger for me? Absolutely, though
Dropbox is not for widows and orphans, those without abdominal fortitude or a
vision for cloud computing’s future.
It is normally futile to pick takeover
targets and an Ouija board could be more useful than a sophisticated cash flow
model in this mug’s quest. However, I am convinced that the world’s biggest
software platform firms will continue to buy emerging high growth enterprise
service vendors. This is as true for Google Cloud Platform as it is for Azure,
Alibaba and even Oracle. Enterprise cloud services is at least a $400 billion
global market with 10% given growth in the next decade and none of the winners
of software’s Gorilla Game can ignore this honeypot. Workday, Zendesk, Box, Atlassian
and Tableau Software have just got to be on the radar of any predatory CEO keen
to leapfrog the cloud computing league table behind Bezos and Nadella – and
offer a jackpot to prescient shareholders!
Oracle (ORCL) has been dead money since
2015 as the Street dissed its “on premises” client transition to the cloud,
even though Oracle has not communicated the sheer scale of “switching”
potential of its corporate constellation to the cloud. Oracle will accelerate
this process with its implementation team’s obsessive focus to cut cloud switch
costs. It is a pity fiscal second quarter earnings in December coincided with
NASDAQ’s free fall and so camouflaged the earnings (but alas, not revenue)
beat. Cloud services/license support was the driver of the EPS beat, a good
omen.
In retrospect, Larry Ellison botched the
industry’s mega shift into cloud based services and conceded market share to
Amazon Web Services, Azure and Google. Yet at 15 times earnings, Oracle is a
“show me” stock that will (hopefully) reward its admittedly masochistic
shareholders. Oracle’s legacy database/applications businesses justify its
valuation but progress on cloud is essential to get back its lost sizzle, let
alone rise to 58 – 60.
The hottest software IPO of 2019?
Palantir Technologies, the predictive Big Data software colossus venture financed
by the Christians In Action (CIA), now led by Countess Gina of Langley.
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