BROADSOFT: THE NEXT CLOUD DARLING
In investing, as in gamesmanship, the ultimate setup is when you
have multiple opportunities to win -- the so called "win-win"
In today's investment world, large cap stocks are so thoroughly
covered and over-analyzed that even if you can predict future
events, it is often hard to decipher how the affected stocks will
react -- a "lose-lose" scenario, if you will.
· A stock beating numbers but missing the all-important "whisper
number" sees their stock trade down sharply.
· Investors crowding in for an event sell the news causing a
stock to trade off sharply during or after the event (i.e. Apple
One small cap stock I have been following for quite some time
qualifies. Few analysts cover it, its story is not well understood,
and there are identifiable catalysts. The stock has a great
risk/reward profile and there are many ways the "win-win" scenario
can play out. I researched this stock with some assistance from the
analysts at PoisedToTriple Research and
that this stock is a winner.
) is the stock and I will walk you through why this stock will
either reach $50 through its own execution or be acquired by the
likes of Google (
), Oracle (
), or others.
My History Covering BSFT
I first started writing about BSFT in early March 2013 with the
stock in the 20s (following a disappointing Q1). I argued that BSFT
offered a compelling level of risk / reward and called for
$40 price target
My thesis was to take advantage of the weak Q1 they reported and
to own the stock for a big growth year in 2014. As we sit here in
early October, the stock has rallied into the 30s from its bottom…
and the big 2014 is still on the horizon.
One valuable lesson I have learned from my years at a hedge fund
is approach every stock as if you had no position and no history
with it. Stocks don't care where you bought them or how long you
have owned them. So, while the stock has rallied sharply off the
bottom I am examining BSFT with a fresh perspective.
Bottom line: the stock is a must own here and I will explain why
in the paragraphs and articles to follow.
Historically, each telephone needed its own dedicated line,
which connected directly to the telephone company (now commonly
known as "carriers"). As time passed, companies found that they
could connect all of their phone lines into a box that would
provide a single connection out to the carrier. That box is called
a PBX (private branch exchange).
Carriers were not happy that PBXs were invented. They would
prefer to have more lines (because more lines = more revenue)!
However, the march of technology can't be stopped, so the carriers
have learned to accept it (while seeking ways to combat it). Cisco
) currently dominates the traditional PBX market, holding 27%
market share. They are followed by Avaya, NEC and Siemens.
) is also a major player in this market via its communications
software platform consisting of Lync, SharePoint and Skype.
Over the last decade, PBX technology has come a long way.
Companies have been steadily upgrading their PBXs to IP (Internet
protocol), which is a fancy way of saying that phone calls
data could be aggregated.
This is where BroadSoft comes in. They enable the move to IP.
Better yet, they sell their solution to the carriers, like Verizon
(VZ), AT&T (T), and Comcast (CMCSA), which can host BSFT's
technology in the cloud. The reason is simple. Why buy and maintain
a box in-house when you can just use a reliable service from your
carrier and pay as you go?
Welcome to the era of cloud communications.
In short, BroadSoft is the carriers' arms supplier in their
fight against Cisco and Microsoft. They don't show up in
traditional PBX market share stats because their solution is
branded by the carriers. However, BSFT already accounts for about
5% of the market penetration in the cloud communications market
(and growing fast).
As the neutral arms supplier to the major carriers, BSFT is a
favored partner. Because of this, they could easily double their
market share over the coming few years.
Ultimately, the overriding issue is "who owns the customer" --
the carrier or the software provider? When the carrier uses
Microsoft or Cisco software, the business interacts with the
software brands: Lync, SharePoint, WebEx, etc. every day so it's
clear that Cisco and Microsoft have the business relationship not
the carrier (i.e. Verizon or AT&T).
However, in the case of BroadSoft, the carrier owns the customer
and BroadSoft is happy to serve its role as the neutral arms
supplier. BroadSoft software is branded as Verizon or AT&T or
Comcast -- whoever the customer may be.
So What Does it Mean for the Stock?
The one thing I have tried to incorporate into every large
position I take is a firm grasp of risk/reward. While most
investors get the reward part down firmly, they ignore the risk
part at their own peril. Risk for BSFT is they poorly execute a
quarter and the stock gets hit, then what do you do? The beauty of
BSFT is that it remains such an enviable acquisition candidate that
buyers such as Oracle are salivating waiting for BSFT stock to
correct so they can pounce and make a bid.
If BSFT reports a light quarter and the stock sells off in one
of the next 3 quarters, I would aggressively buy that weakness as
M&A chatter will heat up immediately thereafter.
Oracle acquired Acme Packet in February, followed by Tekelec in
March. Acme Packet and BroadSoft were such great partners and such
perfect complements that having one without the other would have
been like buying a computer without software to run it. There have
been rumblings in the space that the synergies between Acme Packet
and BSFT are also so evident that Oracle is just waiting for the
optimal moment to move on BSFT.
As for Google, Google Apps has about 5 million users and 33-50%
of the cloud office market. They need BroadSoft's Unified
Communications package to bundle with their Google Apps software
suite to compete against Microsoft Office 365. This is especially
true because Microsoft raised the ante by integrating Skype with
Lync. As a result, Google desperately needs BroadSoft's carrier/MSO
relationships and carrier-level voice quality.
Google Voice has been widely panned as a low-end consumer
service. BroadSoft's carrier quality voice solution seems a
surefire bet to supplant Google Voice's current low quality
offering. William Blair analyst Dmitry Netis estimates that there
exists a $300 million opportunity for BroadSoft to monetize the
existing Google ecosystem based on a $10 per user per month fee. I
would not be surprised if this partnership takes off and leads to
an acquisition by Google to stay competitive with Microsoft's
Why $2 is the Magic Number...
That being said, if BSFT keeps going at its current pace ORCL
and GOOG might miss their chance. As we get closer to 2014, BSFT's
growth is accelerating. Acquisition is a nice backstop, but my 2014
EPS estimate calls for $2.00, 20% above Wall Street's estimates
(which have been rising) and represents 40%+ growth over 2013.
Because of BSFT's enviable market positioning and strong product
roadmap, I believe this level of earnings will attract the
attention of professional investors. A PEG ratio of 1 would yield a
P/E of 40 and therefore a valuation of $80. I'm modeling a more
modest P/E of 25, leading to a 6-12 month price target of $50.
This represents a 40%+ increase from current levels. All
I am long [[BSFT]]. I wrote this article myself, and it expresses
my own opinions. I am not receiving compensation for it. I have no
business relationship with any company whose stock is mentioned in
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