Mobilelron (NASDAQ:MOBL) soared nearly 20% on its IPO, reflecting optimism for the company's presence in mobile and its strong growth last year. The company operates in the fast-growing mobile device management, or MDM, software space and competes against BlackBerry (NASDAQ:BBRY) and VMware (NYSE:VMW), among others. Should you jump in, or is Mobilelron a value trap?
What is MDM?
The company is a leading provider of MDM software that is used to manage and secure mobile devices and applications. The Wall Street assumption is that as data usage by phone and tablet grows, more information will be stored on these devices, and the demand for such management tools will also increase.
This is especially relevant in the phenomenon of corporations allowing employees to use their own devices for work, meaning the need for a secure network, applications, and devices must be present. Mobilelron has been at the epicenter of this segment, but it must now compete with companies like VMWare and BlackBerry.
Last year, Mobilelron grew revenue 158%, year over year. It produced revenue of $105.6 million and reported a net loss of $32.5 million. The stock's 20% IPO pop is clearly a reflection of the 158% growth and Wall Street's continuous focus on rewarding such performance with large premiums.
Taking a big bet
While the positives of investing in Mobilelron seem to be in focus, there are a lot of risks associated with this company. Mobilelron is a pure play in MDM, but other companies that offer MDM software do so in a broader context, having a much larger presence in the overall mobile space than Mobilelron.
Specifically, BlackBerry is attempting to transform itself from a hardware-focused company to a software company, and MDM plays a large role. The company has MDM offerings for its own BlackBerry handsets, which are very popular in business, but also has MDM services for iOS and Android devices.
Earlier this year, VMWare acquired the MDM software company AirWatch for $1.54 billion. The company has about $85 million to $100 million in revenue and will be implemented into VMWare's existing software services business. VMWare is a leading virtualization company with a presence in servers, PCs, and mobile. It has double-digit growth and $5.4 billion in revenue. This means that VMWare has a large footprint in the space to grow AirWatch by a considerable margin.
Mobilelron must contend with VMWare, Blackberry, and others in a space that is growing, yet challenged. GigaOm Research Director Cormac Foster reported in May that the widespread management of applications is not yet functional with MDMs, and that the software is often limited to password enforcement and email protection due to a lack of software compatibility with other applications.
With questions about the effectiveness of MDMs and the rising competition within the space, investors should think long and hard before paying 7.5 times sales for Mobilelron, a company with a market capitalization more than $800 million.
Where to invest?
For investors who believe the growth outlook for MDMs is intact and that it's a good space to have an investment presence, you can find more diversified ways to gain this exposure than MobileIron. VMWare and BlackBerry both have a large presence and have other components to their business.
Granted, many of VMWare's recent acquisitions and ventures lack reason, and have sparked quite a bit of uncertainty. However, BlackBerry shares have fallen 90% over the last five years, and its transformation from hardware to services and software is near complete, with 63% of its fourth-quarter revenue coming from this latter segment. Due to its stock losses, the expectations are relatively low.
While BlackBerry is not a growth company by any means, it is valued cheaply with a strong cash position and a growing presence in services and software. In other words, it looks safe relative to a company like MobileIron that has no backup plan if competition cuts into its MDM market.
As a result, it's rather difficult to justify paying 7.5 times sales, especially when revenue growth decelerated to 9% in the first quarter. Instead, paying 0.60 times sales for BlackBerry looks like a far better option.
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Brian Nichols owns shares of Apple. The Motley Fool recommends Apple and VMware. The Motley Fool owns shares of Apple and VMware. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.