There are a lot of opportunities that highly specialized cloud-computing companies have pounced on in recent years.
Perhaps the best known player in the industry is Salesforce.com (NYSE: CRM). The firm has evolved into a $40 billion company based on the success of its customer service software.
While many users have a love-hate relationship with the software, investors have undoubtedly loved the stock. Shares of Salesforce.com are up over 1,400% in the last decade.
Salesforce has a great story. But it’s far from the only cloud-computing company worth your dollars.
Another player that’s worth a look is Tyler Technologies (NYSE:TYL), a small cap with a market capitalization of $3.7 billion.
Tyler Tech is a small, yet stable company that’s growing at a steady rate. It’s exactly what I think investors want in a long-term technology investment.
The company supplies information technology for public institutions, most notably local and state governments, schools, courts, cities and counties. Tyler Tech provides the software, hardware, data conversion and training to bring these organizations up to speed, and keep them running smoothly.
When the recession hit, local governments had no money. Tax revenues dried up, but expenses didn’t. That meant they had to cut back on spending.
Now, tax revenues are rising and public institutions are once again working to improve the way they do business. Much of that improvement comes from adopting new technologies that are more efficient and cost effective than the old way of doing business. This is where Tyler Tech comes in.
The company’s services automate three critical functions for public institutions: financial management and education, courts and justice, and property appraisal and tax.
Its services include traditional software installations as well as increasingly popular cloud-based subscriptions.
This cloud-computing stock is benefiting as state court systems adopt its e-filing service. Two new clients include the states of Texas and Massachusetts.
As more states move in this direction Tyler Tech is in a perfect position to capitalize. Texas and Massachusetts are just two states. There are 48 more states out there. That spells opportunity over the next decade.
Tyler Tech crushed expectations in the most recent quarter when it delivered EPS of $0.59 (versus $0.51 consensus) on $128.7 million in revenue (versus $124.35 million consensus).
The company’s recurring revenues from subscriptions and maintenance are one of the reasons growth is compounding. In the last quarter, recurring revenues grew by 20% and now make up 60% of total revenues.
That’s a very stable revenue base, and is helping to push profit margins up. Gross margin is now at 48% after a 1.7% improvement.
There is still a lot of room for growth for Tyler Tech. And I think that’s what the market is realizing too.
Government spending has returned to pre-recession levels, and Tyler Tech’s solutions have demonstrated advantages over the competition.
I love companies and business models with safe revenue streams. When these companies also achieve extremely reliable growth year in and year out, I’m usually on board.
Since reporting, shares of Tyler Tech have broken out and now trade at a 52-week high of $110. At this price, I advise establishing a small position, then waiting for the next pullback to buy more.
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