Citrix Systems, Inc. (NASDAQ:CTXS) and Progress Software Corporation (NASDAQ:PRGS) are two business software companies which we can compare LogMeIn to. Each of these stocks has a trailing earnings multiple greater than 30, so their valuations are high relative to historical performance as well. As at LogMeIn, analyst consensus is for quite a bit of improvement at these companies- even though Citrix and Progress are larger businesses- and so their current-year P/Es are closer to 20. However, we’re always wary of expectations of rapid rises in net income. In fact, both Citrix reported a double-digit percentage decrease in earnings in its most recent fiscal quarter compared to the same period in the previous fiscal year. While Progress’s net income was up sharply, a fall in revenue indicates that this performance might not be sustainable.
We think that LogMeIn is too speculative a stock to buy at this time. Much of the company’s valuation comes from the assumption of high earnings growth in the next two to three years (judging by, for example, the gap between the trailing and current-year earnings multiples) and the current growth trajectory seems to low to bear that out. We’d advise investors to avoid it.
Disclosure: I own no shares of any stocks mentioned in this article.