Tech IT Easy

I have a hard time making up my mind on which software stock could represent an interesting investment opportunity. The recent world stockmarket rally has convinced me to sell stocks I was holding to for quite a while (like Apple Inc.). I spent a quarter of it in booking my next vacations, another quarter for a birthday present to someone I love, and I hold the other half in my current account.

I’m looking for one or two companies with strong fundamentals (few or no debts, strong FCF generation, global presence, growing market, good client feedback on main products, consistent product portfolio, capacity to build win-win partnerships within its own industry, attention-raising product pipeline as I am to invest in the long-run ie more or less 4 years, managers who have become managers through internal promotions, growth strategy: I’m keener to invest on companies who grow organically rather than through repeat M&As - so no Oracle for me thanks, reasonable cash compensation to CEO - so no Business Objects for me thanks).

So, I started scanning for a company that has good value for money, looking at ratios over time and all (one ratio considered for one single year has very little meaning, you should look at the forecast curve to get a good grasp of market trends so don’t consider the present table for a decision making purpose - it’s just a tool aimed at supporting a demonstration). I have compiled this little table that shows that in 2007, Web 2.0 stocks are to be twice as expensive as enterprise software! Obviously, if you consider 2008 and 2009 PER or a PEG (price over earnings to growth, quite a relevant metric when considering Internet companies) ratio, the gap becomes sort of less significant - but I wanted to shock in order to make my point.

And my point is that enterprise software companies are not so expensive after all. The recent stockmarket rally came to prove that big caps have lots of cash to spend, & IT spendings in 2007 look very promising indeed. My call is that 2007 will be a historical vintage in the history of B-to-B software.

Furthermore, the market has become quite predictable, margins are pretty high as in the entire software industry, clients have cash to invest, and market demand is identified: basically all big accounts have had finance and HR modules installed. So the focus for software vendors will be on integrating business intelligence better, investing in more flexible CRM systems (supply chain systems as soon as there’s a market downturn). I should also mention 2 more things: 1) the relative affordability of financial software vendors although market finance is in desperate need for competitive advantage-granting solutions; 2) the hot and getting hotter SME market where Sage, SAP, Oracle & Microsoft (with Microsoft Dynamics) and many other ISVs have been at loggerheads.

I haven’t made up my mind yet, but I’m thinking of CEGID (very strong on the growing European SME market) and Baidu (the number one search engine in China - but I still have to figure out which broker allows trading with China). What do you think?

Disclaimer: as this post is about to be published, I’m an unsignificant stockholder at Boursorama, Microsoft Corp., SAP & Dassault Systèmes - all 4 companies are mentioned in this note.