Cloud computing has cooled off a bit as a Wall Street buzzword, but the industry is growing as fast as ever, as data, services and applications move to the web. Today’s recommendation is an almost-brand-new (its IPO was in March) way to play the industry’s continued growth. Here’s Cannaccord Genuity’s Richard Davis with the new recommendation:
“There is significant value to being the largest and fastest-growing next-generation cloud eCommerce platform available for public investors. This describes Demandware, Inc. (DWRE) now that the firm appears to have crossed the chasm to its ‘tornado of growth’ phase. If we are correct that the firm has several rapid growth years ahead, then DWRE shares are likely to not only grow into today’s high valuation, but to meaningfully outperform the market during this ramp phase.
“We are initiating coverage with a BUY rating and $32 price target.
Investment Highlights
“Two levers to growth: new customer additions and existing base eCommerce growth: DWRE’s transactional pricing model not only aligns incentives with customers but also allows the business to grow with the success of existing customers.
“Competing against an installed base of legacy technology: Much of the deployed eCommerce technology in the market today is 10+ years old. DWRE’s next generation platform provides the control and flexibility of an internally designed site without any of the costs or responsibility of managing the infrastructure or performance.
“Accelerating growth and meaningful operating leverage: We believe near-term growth should accelerate into the high-30s and longer-term operating margins could scale to 25%+. These dynamics typically result in multiple expansion (or at least maintenance in a high-valuation scenario) and a stock that outperforms the market.
Valuation and Price Target
“Our $32 price target is based on an 8.4x EV/revenue multiple based on our C2013 estimate of $96.5 million and gives consideration for approximately $95 million in prospective net cash.”
- Richard Davis, CFA, Canaccord Genuity Research, April 24, 2012