Top tips for investing in cloud computing stocks
Link copied to
Cloud computing has transformed and revitalised the IT services industry says TechVoyage’s Tim Knapton, one of Australia’s top experts on ASX-listed tech stocks.
Cloud computing allows companies to avoid the cost and distraction of running software and systems installed on their own infrastructure by outsourcing operational, maintenance, reporting, security and back-up costs to a remote service provider.
“Cloud” has since become one of tech’s most ubiquitous buzzwords and led to double digit industry growth rates.
The transition of applications and workloads from on-premise data centres to the cloud — as well as development of cloud-ready and cloud nativ- applications — will continue fuelling growth for years to come.
There is also evidence that IT services demand is picking up due to systems integration around mobility solutions and as the economy continues to digitise and become more data-generative.
Not surprisingly, nimble new entrants are well positioned to build a footprint and there are several good listed micro-cap examples.
Empired (ASX:EPD) offers a broad range of managed IT services and cloud migration to facilitate large corporate and government organisations to digitally transform.
It is one of the biggest Microsoft solutions providers in the region with more than 1000 staff.
Last financial year the group won numerous multi-year contracts with major new customers and more than doubled its EBITDA to more than $15 million.
The stock has risen almost 50 per cent over the last three months — but it’s market cap is still less than $100 million, which means it’s trading on barely six times historic EBITDA.
Rhipe (ASX:RHP) offers enterprise clients a cloud channel, comprising all aspects of migration via an ecosystem of service providers.
The company’s licence agreements with Microsoft allow systems integrators, telcos, SMEs and others to deliver services using Microsoft software.
It also has licences with other specialised providers such as vmware, Citrix, DataCore and Redhat which allow access to cloud-based solutions for CRM (Customer Relationship Management), marketing, enterprise and data management.
Last financial year, Rhipe’s software licensing revenues reached almost $160 million.
The company’s revenue growth has been a little disappointing and its EBITDA margins are slender (less than 3 per cent) but there will be significant economies of scale ahead and it is trading on a historic revenue multiple of only 0.6 times.
Motopia (ASX:MOT) has its own suite of technology assets that enable legacy systems to be migrated to the cloud.
Its COTS (Commercialisation Off The Shelf) modernisation technology allows for seamless migration of data, systems and all IT assets to the cloud in an integrated CRM, POS (Point Of Sale) and e-commerce store with real-time inventory monitoring.
Earlier this month the company acquired Cirralto Business Services which has a proprietary platform for migrating data to the cloud.
As a result Motopia has projected revenues of $2.5 million this financial year and expects to transition into profitability in the March quarter.
That makes its market cap of only $9 million look modest.
Growth by acquisition has been a strategic focus of many of the larger, traditional IT services and SI (Systems Integration) players — and it’s likely some may run the numbers over smaller, more pure cloud players like those above.
Tim Knapton is the founder and CEO of online tech research and finance marketplace TechVoyage. Its video/financial database and digital broadcast platform provide a more efficient way for investors to appraise listed and unlisted tech companies and for entrepreneurs to finance, acquire and exit them.
Previously Tim was Head of Corporate Broking at Deutsche Australia and before that ran a research department for a leading broking house. Tim has also been a freelance tech/finance journalist for more than 20 years and a columnist with The Australian Financial Review, The Bulletin, BRW, Shares and Australian Business.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.