It's hard to think of LogMeIn ( LOGM ) as an underdog anymore.
This scrappy tech firm took on the likes of Cisco ( CSCO ), Microsoft ( MSFT ) and Citrix ( CTXS ) and pioneered remote access to desktop and handheld devices via cloud computing. Now it's turning its guns on targets like Salesforce.com ( CRM ), Oracle (ORCL) and Zendesk (ZEN).
[ibd-display-video id=2551913 width=50 float=left autostart=true] Early this year, it tripled in size overnight to become one of the world's top 10 Software-as-a-Service, or SaaS, companies based on revenue, thanks to its $1.8 billion merger with Citrix's GoTo business.
"The company is well on its way to its three-year, post-acquisition targets, and we believe the cash flow opportunity still justifies a much higher stock price," JPMorgan analyst Sterling Auty wrote in a recent note to clients, after LogMeIn disclosed financial results for the third quarter. JPMorgan is a market maker in LogMeIn shares.
Based in Boston, LogMeIn offers software tools for cloud connectivity and collaboration, secure device access, and remote customer support. For an increasingly mobile and global workforce, it offers products such as Join.me, for online meetings; GoToWebinar, for online seminars; GoToAssist, for online assistance; and LastPass, for online password management.
Now LogMeIn is at that point where it's an established tech player, yet small enough with around $1 billion in annual sales to generate powerful growth.
Thanks in part to a 23% annual pretax profit margin and 26% annual return on equity, LogMeIn ranks No. 1 out of 56 companies in IBD's enterprise software group. ServiceNow (NOW), Paycom Software (PAYC), Blackbaud (BLKB) and Salesforce round out the top five.
An Array Of Customers
Within its core markets, LogMeIn is growing fastest in what is known as the identity business. LastPass, a product that offers simple and secure access to apps, devices and data, is doing especially well.
In an email interview with Investor's Business Daily, LogMeIn Chief Executive Bill Wagner described his company as a leader in serving small and medium businesses. LogMeIn also counts millions of individuals among its customers, as well as the largest technology providers such as Dell Technologies (DVMT) and HP Inc . (HPQ); the world's biggest telcos like Verizon (VZ) and Australia's Telstra; and familiar Silicon Valley growth names like Evernote and Dropbox.
A key market where LogMeIn sees long-term growth opportunity is a realm known as Unified Communications and Collaboration. It's one that has emerged as traditional enterprise collaboration vendors such as Microsoft and IBM (IBM), as well as traditional enterprise communication vendors like Cisco, have made inroads into each other's turfs.
"Prior to the (GoTo) merger, our popular Join.me product was a high growth disrupter in the collaboration market," Wagner said. "Now we have products like GoMeeting, GoToWebinar, OpenVoice and Grasshopper, which essentially bolstered our annual (communications and collaboration) sales by an order of magnitude."
JPMorgan's Auty says LogMeIn built a successful franchise in remote access, then added several related high-growth businesses around that core, such as web conferencing. Yet he sees room for even more. Auty noted that LogMeIn hit a targeted $100 million in cost synergies a year ahead of plan, and revenue synergies are already starting to kick in. For example, LogMeIn consolidated 50% of data centers and is successfully cross-selling LastPass subscriptions to GoTo customers.
Beyond software applications, Auty sees a "larger opportunity" in providing a cloud platform for companies tied to the Internet of Things.
A LogMeIn spokesperson told IBD that the company's fledgling IoT efforts are centered on customer engagement and support. That could pit it directly against Salesforce's Service Cloud as well as Oracle and Zendesk.
Showing Up In Results
It's all showing up in the quarterly results. During the third quarter, LogMeIn logged triple-digit earnings and revenue gains , while cash flow from operations surged to $90.5 million, a hefty 33% of revenue. The company also raised guidance for profits and free-cash-flow margins for 2017 as a whole.
Shares briefly shot to an all-time high of 129.52 but now sit 7% below that peak, undercutting a 121.35 entry they cleared in October. Still, they are up about 24% year to date, while the S&P 500 has risen 16% over the same period.
Auty rates LogMeIn stock as overweight and upped his price target from 140 to 145.
In February, CEO Wagner hinted at "big ambitions" while alluding to a next generation of cloud technologies.
IBD'S TAKE: Software stocks and cloud players have a strong presence in the IBD 50 list of top growth stocks, where you can find new ideas for your investing watchlist.
Just a handful of months later, the company acquired the Israeli firm Nanorep. An artificial intelligence, or AI, and machine learning expert, Nanorep already makes chatbots and virtual agents "more human" for hundreds of companies across the world, including Intuit (INTU), FedEx (FDX) and Vodafone (VOD), according to LogMeIn.
The acquisition accelerates LogMeIn's efforts in the rapidly growing market for digital customer service - one that it expects to balloon from 3% of all customer service interactions in 2017 to 30% by 2022.
Wagner told IBD that the $45 million Nanorep deal builds on his company's history of disruptive innovation.
"We were an early innovator in the 'freemium' business model, a structure we relied upon for our organic growth in the early days of the company and one that has been copied by many other successful technology companies," Wagner said.
Converting Free Users To Payers
That model, of converting free users to paid or premium subscribers, was successfully deployed by Join.me. It offered single-click, frictionless sharing of screens, showing up older rivals like Cisco's WebEx and Citrix's GoToMeeting. GoToMeeting is now part of LogMeIn's portfolio.
Launched in October 2010, Join.me was recognized as the fastest-growing web-conferencing product less than five years later.
LogMeIn is now looking to harness Nanorep's AI expertise across its entire, newly expanded suite of product offerings. With GoTo under its belt, the company says it supports 25 million users and 900 million conferencing minutes every month, as well as roughly 200 million customer engagements and 5 billion voice minutes every year.
But as LogMeIn targets new markets, challenges await. Patent litigation could resurface and roil the stock, experts caution. Plus, upstarts like Splashtop and TeamViewer are moving into remote access, support and monitoring.
Competition in this increasingly crowded space is expected to drive down prices, with only the strongest players likely to survive.
Still, analyst expectations for future growth have marched up, notwithstanding LogMeIn's formidable annual 45% earnings growth rate and 46% sales growth rate over the past three years.
Consensus estimates call for annual earnings of $3.28 per share in 2017, up from $2.03 in 2016 and from $1.66 in 2015. Earnings are seen climbing to $4.10 a share in 2018, according to Zacks Investment Research.
Revenue is forecast at $1.02 billion in 2017, ballooning from $336 million in 2016 and from $272 million in 2015. It is seen rising to $1.17 billion in 2018.
LogMeIn's free cash flow, a key valuation metric, has especially impressed industry analysts. Its free-cash-flow margin is now expected to be 30% for the year and to expand to more than 33% in 2019, said Matthew Hedberg of RBC Capital Markets.
Investors and analysts await the strategic road map that Wagner is set to discuss at an event on Dec. 19.
"We think the event could be a catalyst as management updates longer-term targets," Hedberg wrote on Oct. 26, calling LogMeIn a "favorite idea" for the rest of this year. He rates LogMeIn stock an outperform and hiked his price target from 140 to 143.
Could This IBD 50 Software Stock Be The Next Cloud-Transition Star After Adobe?
Stocks To Buy And Watch: Top IPOs, Big And Small Caps, Growth Stocks