At a time when quite a few enterprise software firms sport steep valuations, several of those that don't have been targeted by peers and institutional investors -- in spite of having some baggage attached.
Over the last couple of months, we've seen:
- VMware (VMW) announce that it's buying Pivotal Software, which like VMware is controlled by Dell Technologies, for $2.7 billion. Prior to the deal announcement, Pivotal was down nearly 50% on the year, after having plunged in early June due to weak results and guidance.
- Broadcom (AVGO) follow up on last year's CA Technologies deal by announcing that it's buying Symantec's enterprise security operations for $10.7 billion. In addition, since this deal was announced, private equity firms Permira and Advent International have reportedly made a $16.4 billion bid for the whole of Symantec, whose shares have been range-bound for much of this decade amid share losses and execution issues.
- Carl Icahn disclose an 18%-plus stake in big data/analytics software firm Cloudera (CLDR) , whose shares were down over 70% from their 2018 highs prior to news of Icahn's stake. Icahn and Cloudera reached a standstill agreement in August.
- Activist investor Starboard Value disclose a 7.5% stake in cloud storage/collaboration software provider Box (BOX) . Box's shares were 40% below their 52-week high, and more than 50% below their May 2018 high, before Starboard made its disclosure.
This uptick in corporate and institutional interest in relatively beaten-down software names doesn't necessarily mean that more richly-valued firms will cease to draw interest. Indeed, VMware's Pivotal deal announcement was accompanied by news of a $2.1 billion deal to buy endpoint security software firm Carbon Black (CBLK) . Whereas Pivotal is being acquired for just 3.5 times its expected fiscal 2020 (ends in Jan. 2020) sales, Carbon Black is being acquired for 8.6 times its expected 2019 sales.
Over the last couple of years, there have also been a number of other large software deals featuring elevated multiples. Notable ones include IBM's $34 billion deal to buy Red Hat, SAP's $8 billion purchase of Qualtrics, Salesforce.com's $15.7 billion purchase of Tableau Software and $6.5 billion purchase of MuleSoft and Ultimate Software's $11 billion sale to an investor group led by PE firm Hellman & Friedman.
In a way, the fact that corporate/institutional interest in cheaper software firms -- generally companies that have had one or more earnings disappointments this year -- has grown acts as a fresh endorsement for the health of the broader enterprise software industry. The industry is still growing at a high-single digit clip (much better than total IT spending) as businesses conclude that it's in their interests to make larger software investments in a wide variety of fields. And while it wouldn't be right to call the industry completely recession-proof, its shift towards subscriptions from traditional, up-front, license sales could help it fare better during downturns than it has in the past.
With that in mind, here's a list of software firms carrying moderate valuations that could conceivably draw interest from a peer, an activist and/or private equity. As always, readers are advised to do their own research.
- Pluralsight (PS) . Shares are down 46% over the last 12 months, and currently trading for 5.2 times expected 2020 billings. Pluralsight provides online training courses for IT professionals.
- Talend (TLND) . Shares are down 43% over the last 12 months, and trade for 3.8 times expected 2020 billings. Talend provides a number of data integration software tools.
- Zuora (ZUO) . Shares are down 35% over the last 12 months, and trade for 5.1 times expected fiscal 2021 (ends in Jan. 2021) billings. Zuora provides software for managing subscription-based businesses.
- New Relic (NEWR) . Shares are down 40% over the last 12 months, and trade for 5.4 times expected fiscal 2020 (ends in March 2020) billings. New Relic is a major provider of application performance monitoring (APM) software.
- Dropbox (DBX) . Shares are down 20% over the last 12 months, and trade for 4.4 times expected 2020 billings and 17 times expected 2020 free cash flow. Dropbox, as many readers likely know, provides a cloud storage and file-sharing platform.
- PTC (PTC) . Shares are down 33% over the last 12 months, and trade for 5 times expected fiscal 2020 (ends in Sep. 2020) billings. PTC provides a number of engineering and industrial software offerings.
- SailPoint Technologies (SAIL) . Shares are down 31% over the last 12 months, and trade for 5.3 times expected 2020 billings. SailPoint provides identity/access management software.
