Tech Beat: Business software
Two strategies for making a profit on stocks: 1) buy a deeply discounted stock and hope for a rebound, and 2) pick a stock at or near its highs, in the belief that if things are good now, they can only get better.
The two business software makers profiled here fall squarely under that second investment strategy. Their stocks have already enjoyed a good run, but demand for their products is still gaining momentum, suggesting they have further to go before they peak.
When it comes to business, or enterprise software, there are the very largest companies like International Business Machines (NYSE: IBM) or SAP AG (NYSE: SAP), and there are a host of smaller firms that make add-on products designed to help companies further organize their data. These products generally help businesses sort data into more understandable formats like brief summaries, charts or graphs. They often add analytic features for better understanding the data and additional services for retrieving it and sharing it securely.
The more material that companies store, the more challenged they are to organize all of it, which is why software makers like DataWatch Corp. (Nasdaq: DWCH) and Actuate Corp. (Nasdaq: ACTU) have generated so much investor interest. The proliferation of cheap storage technology means that most companies are swimming in data. Imagine trying to retrieve some basic company statistics from a roomful of old metal filing cabinets jammed with paper, and you get some sense of the challenge of organizing electronic files.
DataWatch Corp., a business software maker with annual revenues of just $20 million and a market cap of less than $30 million, has over the past year become a small-cap success story. Shares of the Chelmsford, Mass. company have doubled since the start of the year, trading recently at around $5.35, up from $2.62 in early January.
The surge in its stock price mirrors a steep rise in sales and earnings, which after a relatively flat three years have grown sharply in early 2007. Revenues in the third quarter ended in June totaled $6.5 million, up from $5.3 million in the year ago quarter, continuing a string of revenue gains: in the March quarter revenues totaled $6.2 million, up from $5.8 million in the December 2006 quarter and $5.3 million in the September quarter of last year. The company broke into profitability at the end of 2006.
In the third quarter ended June 30, DataWatch earned $382,000 or $0.06 per share, compared with a loss of $315,000, or $0.06 per share, in the year-ago quarter.
Although still relatively small, DataWatch’s massive customer base of more than 20,000 companies and government agencies suggests it has a lot of room to grow. The company says some of its recent growth reflects the strong adoption of products like its Monarch software application, which transfers text files into databases so that users can easily build spreadsheets.
One analyst who follows the company sees continued strong growth, and is projecting earnings of $0.19 per share in 2007 and $0.28 per share in 2008, compared with a net loss of $0.10 per share last year. That same analyst sees revenues growing from $20.8 million last year to $24.1 million this year, and $26.7 million in 2008.
Actuate Corp., another business software maker, is somewhat more mature than DataWatch, but is still producing impressive share price gains. Its stock closed at $5.99 per share on Wednesday, up from $5.73 at the start of this year, and $3.84 a year ago.
Unlike DataWatch, whose results have really taken off this year, Actuate has shown somewhat flat results in recent quarters. Still, it has a longer term pattern of steady growth, which analysts expect to continue in the future.
South San Francisco-based Actuate, which makes a variety of business software products for analytics, spreadsheet reporting, sales and account management, earned $13.7 million in 2006, up from $11.6 million in 2005 and $1.3 million in 2004. Its revenues in 2006 rose to $128.6 million, from $106.4 million in 2005 and $104.7 million in 2004.
In April, the investment firm B. Riley & Co. upgraded Actuate to “buy” from “neutral.” In all, four analysts who track Actuate are forecasting net income of $0.30 per share this year, and $0.36 per share next year, compared with $0.23 in 2006.
IDC recently estimated that most companies’ storage requirements are growing between 50% and 100% a year. DataWatch and Actuate have the potential to grow in line with the growing volumes of data that companies are storing and sorting.
