How to Profit from Cloud Computing- The Next Frontier
Computing on the cloud is a service that software engineers claim to be the next big thing since the internet. The ability to be able to remotely store data and retrieve simply with an internet connection presents many advantages for consumers. While it is a burgeoning technology, investors are seeking promising companies that may make it big in the information technology space when cloud computing hits the mainstream.
Several well-known companies have been ramping up efforts to expand their cloud computing services. Firms in this space include Amazon (NASDAQ: AMZN) and Akamai (NASDAQ: AKAM). Currently, Amazon and Akamai offer various cloud services to institutional clients, attempting to streamline data entry and informational security. The number of prospective clients is so vast that other companies are able to make a mark on the market as well.
A smaller company that provides cloud computing services to a particular client base is IntraLinks Holdings (NYSE: IL). Formed in 1996 by Wall Street professionals, IntraLinks primarily focuses on serving clients in the financial services sector, but also provides cloud solutions to a variety of firms in sectors such as health care, industrials, and real estate.
Like larger cloud firms, IntraLinks provides content management and data streamlining services to its clients. The firm also takes its business a step further, claiming to provide enough security for even the most high-profile business development transactions, such as initial public offerings as well as mergers and acquisitions. Investors who are attempting to diversify their portfolios with a small-cap value stock may want to research IntraLinks Holdings. However, there are risks in IntraLinks Holdings's stock as a result of major competition and its small-scale industry focus.
From a fundamental standpoint, IntraLinks' balance sheet has been growing positively. From 2009 to 2010, the company increased its cash on hand from $30 million to $50 million; likewise, receivable increased from $26 million to $37 million. Property, plant, and equipment increased from $13 million to $20 million, indicating physical expansion. This may be indicative of plans to widen its client base and further garner market share.
IntraLinks' liabilities have also shrunk significantly, from $571 million to $239 million. Payables and long term debt have considerably decreased, each cut by over 50%. Lastly, other long-term liabilities were cut from $181 million to $2 million. All of these material reductions in IntraLinks' debts point to a concerted effort to improve its efficiency. Along with a heavily reduced liability number, IntraLinks' shareholders' equity increased appreciably, from -$62 million to $287 million.
The company's efforts to maximize cash flows have also been reflected in its SEC filings. Cash flow from operations increased from $36 million to $46 million as a result of improved net income. IntraLinks' revenues increased from $141 million to $184 million, resulting in a large boost to its income figures. Commonly, companies charge clients for services to be performed in the future. IntraLinks has mentioned in its filings about the stringency its accountants place on proper revenue recognition. This implies that the balance sheet is not overstating its cash balance or its shareholders' equity. This is particularly important, as the company has reported much better performance over the last year as compared to 2009.
In the equity markets, IntraLinks is trading lower than comparable companies. It trades 1.2 times book value and sales. Competitors trade at 3.4 times book and 3.1 sales, indicating that the company's stock may have room to appreciate in the marketplace. IntraLinks also boasts a very low debt/equity ratio of 0.4; competitors' average ratio is 1.7. The firm's operating margin is not as good as competitors', but it may be artifact of IntraLinks' formerly large debt position. Using the last two years to pay off its debt, the company's costs and overall growth will be stifled, but taking care of the debt improves the company for long-term performance.
A major risk that investors may want to consider is that several large-cap companies are heavily involved in the cloud computing space. Google, Amazon, and Akamai are all frontrunners in this technology, each of which has significant resources and large client bases. Their abilities to provide services on a larger scale than IntraLinks could be a detriment to IL stock.
IntraLinks Holdings is an interesting investment opportunity for investors who seek a small-cap stock in a niche industry. Cloud computing is a highly anticipated technology, and IntraLinks appears to be an undervalued stock with increasingly strong fundamentals. Investors should conduct more research in the industry and the company itself before considering making any long-term investments in the company.
Traders who believe that IntraLinks Holdings is an appropriate long investment might want to consider the following trades:
- Cloud computing is a technology that industry experts believe will be widely used in both professional and personal settings.
- IntraLinks is undervalued compared to direct competitors despite significantly improving its balance sheet over the last year.
- For a small-cap company, the accounting standards are stringent and clearly depict its year-over-year growth.
Traders who believe that IntraLinks Holdings is more suited for a short play may consider an alternate position:
- The company has a smaller operating than competitors.
- Large companies like Amazon (NASDAQ: AMZN), Akamai (NASDAQ: AKAM), and Google (NASDAQ: GOOG) are widely known competitors in the cloud computing business.
- IntraLinks Holdings is a small cap equity, and may not be appropriate for certain investors' risk appetite.
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