by Gary Spivak, Investment U Research
Wednesday, October 10, 2012: Issue #1878
Sexy usually sells. But sexy doesn’t always win…
For instance, with the start of another football season, fans will track the exploits of their favorite quarterbacks, running backs and receivers.
But the real football fan knows that it’s usually the unsung, unsexy offensive line that helps make good things happen and helps stop the bad things from happening. Again, we refer to Dell’s (Nasdaq: DELL) recent acquisition of Quest Software (Nasdaq: QSFT) as a perfect example.
Quest started out as a vendor of database management tools. It then expanded into other management tools.
Databases are easy to understand, with Oracle (Nasdaq: ORCL) being the big kid on the block. Let’s say you run your business on one of the big applications from SAP (NYSE: SAP) or Oracle. You need to store, create, collect and draw intelligent decisions around the data associated with that application. Databases are built with this in mind.
The thing with a database is that now it becomes a critical component of your infrastructure that needs to be managed. It has to be available, you have to plan for adding storage, the application needs to perform to its users’ expectations and you need to know when you have to buy more stuff.
The Ferrari Example
Let’s utilize a simple analogy to explain. Let’s say your business needs a car (a large software package to run it). You buy a high-priced car like a Ferrari (SAP or PeopleSoft from Oracle or some other package). Think of the database as the engine of that car.
The management systems (that manage the database, applications, network, storage, etc.) are the dashboard. They tell you if the engine is too hot or too cold, how fast you’re going, when you need to re-fuel, etc.
You buy the Ferrari because it purrs and you can afford it. You ask about the engine, how big it is, how fast the car can go. You look at the dashboard, but basically accept that’s how you’ll see what you need. You won’t buy the car based on the way the gauges and lights are configured on the dashboard – but you won’t buy a car without a dashboard!
Of course, you can drive a car without any working gauges – but you wouldn’t if you had a choice…
In an earlier article, I wrote about how several of the leading technology companies envy IBM and have taken steps to look more like it. Companies such asDell and HP are behind in this race, and need to take steps like Dell’s recent acquisition.
But why is this an important topic? Because management software, even if it’s not sexy, is important, and there are still a lot ofindependent vendors out there that could be attractive to the right strategic buyer.
Some Names You Should Consider
- BMC Software (Nasdaq: BMC) – A recent “spat” with activist investors Elliott Management has led to board seats for Elliott. This could shift the board more towards considering a sale to a strategic buyer. (It recently announced it’s exploring the possibility of a sale.) Dell would have been a better fit before the Quest acquisition, but still would be on the list of suitors along with Hewlett-Packard, Cisco and even Oracle.
- OPNET Technologies (Nasdaq: OPNT) – This strong niche player in network and applications performance management would fit in nicely with a number of larger vendors that appreciate the space. Although the stock has rebounded somewhat from a disappointing March quarter, it’s still well below its highs for the year, without a meaningful downtick in its fundamentals.
- Keynote Systems (Nasdaq: KEYN) – Another niche player in website performance management is one of only two vendors focused on monitoring website performance from disparate locations. The stock is at an attractive level as a result of some modest quarterly earnings disappointments and the digestion of an acquisition.
Software companies are notoriously back-end loaded. This means that a lot of any quarter’s business comes in the last few days of the quarter. With macro-economic uncertainties on everybody’s minds, these stocks aren’t for the “widows and orphans,” rather, they best belong in a well-diversified portfolio.
Europeremains a question mark, and the September quarter is usually the weakest. Greece will remain in the headlines.
So start a shopping list of unsexy management software names – but be mindful of the risks.