Salesforce.com (NYSE: CRM ) has lost 16% of its valuation in the last three months, in part because of a momentum stock sell-off, but also because of the focus on current cloud leader Amazon (NASDAQ: AMZN ) . Nonetheless, salesforce.com is growing fast -- so, should investors buy, or seek specific exposure to the cloud in companies like Aspen Technology (NASDAQ: AZPN ) ?
Is salesforce.com fairly valued, or presenting value?
The cloud is often referenced as a high-growth industry in technology, used for storing and sending data and as a platform for creating applications, among many other uses. Essentially, cloud services, or software-as-a-service, make daily activities for businesses simpler, and oftentimes cheaper.
Salesforce.com is considered the quintessential cloud play, a company with a presence in countless different types of software-as-a-service. Yet, a significant portion of its business, about one-third, is tied to the lucrative app platform, or PaaS, and to a lesser degree cloud infrastructure, or laaS.
PaaS and laaS combined is a $12 billion a year market growing at north of 50% annually -- $3.5 billion of combined revenue in the first quarter. In PaaS, salesforce.com currently has the leading market share at 18% according to Synergy Research, but its laaS market share hovers around 3%, like most of its competitors in the space.
With that said, salesforce.com's revenue grew 37.8% to $1.23 billion in the first quarter. While this shows explosive growth, the problem is that salesforce.com's growth is lagging the overall PaaS/laaS market, and Amazon is pulling away. In Amazon's most recent quarter, its cloud business grew 60%, exceeding the overall industry and therefore gaining more market share.
In fact, Amazon's cloud business accounts for roughly 30% of the $12.5 billion business, and it is now generating well over $1 billion in quarterly revenue. Because of this growth, and the overall performance of this market as a whole, Evercore recently estimated that Amazon's cloud segment alone is worth $50 billion, or 12.5 times $4 billion. Moreover, analysis shows that Amazon's cloud segment will create $24 billion revenue in the next eight years. In comparison, salesforce.com trades at 7.4 times sales, is far from profitable because of discounting, and is losing market share by the quarter.
Hence, salesforce.com is likely not presenting investment value, but is rather fairly priced given its fundamental performance, and relative to the valuation of other platforms. On the other hand, Amazon trades at about 1.25 times sales, excluding the valuation of its cloud segment, thus making it rather attractive given its recent stock declines.
Where to invest for pure cloud
You can't really invest in Amazon as a pure cloud play, seeing as how more than 95% of its business comes from e-commerce. Therefore, if you are seeking a pure cloud play, Aspen Technology is an intriguing stock.
Aspen doesn't compete directly with the likes of Amazon or salesforce.com in that it has its own segment of the market. The company creates and sells services that make training, presenting, and software integration easier in complicated industries such as energy, chemicals, and engineering.
The company holds numerous patents and has a great grasp and presence in this industry, is expected to grow 24% in 2014, and demands a pricing premium. Therefore, it has unprecedented operating margins of 29%, which are unheard of in the cloud.
Big technology companies see the opportunities present within the cloud. As a result, the fastest growing segments like PaaS and laaS are becoming crowded quickly. Therefore, investors must seek an edge in companies that have an operational advantage, including expertise in other segments of the cloud that are less populated with competition, but are dominated by one specific company.
Aspen falls into this category, and because it caters to difficult industries, its growth and market share is likely intact. Unfortunately for salesforce.com, this is a luxury it does not possess, so recent losses are not an opportunity, but rather a necessary correction.
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