, inc. (CRM), J2 Global Inc (JCOM): This Cloud Service Business Seems Like a Decent Buy

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J2 Global Inc (NASDAQ:JCOM) has been on the rise since the middle of 2012, climbing from $25 per share to nearly $43 per share. Trailing twelve months, the business delivered more than a 20.1% return on equity with an impressive operating margin of more than 39.5%. Famous investors like Paul Tudor Jones, Ken Fisher and Steven Cohen also have it in their portfolios. Is the company a good buy now? Let’s find out.

J2 Global Inc (NASDAQ:JCOM)

A consistent growing business with recurring revenue

J2 Global Inc (NASDAQ:JCOM), founded in 1995, is a provider of Internet services, including cloud services for businesses, product reviews for consumers and an innovative data-driven platform to help advertisers target the right audiences. It operates in two main business segments, Business Cloud Services and Digital Media. Most of its $187.4 million operating income was generated from the Business Cloud Services segment, while the Digital Media segment contributed only $2.9 million in 2012. Interestingly, the revenue from the Business Cloud Services segment was produced through monthly recurring subscriptions and usage-based fees which were paid in advance by credit card. The company’s fixed subscriber revenue accounted for as much as 81.3% of its total revenue in 2012.

In the past four years, J2 Global Inc (NASDAQ:JCOM) managed to consistently grow both its top line and bottom line. Revenue increased from $246 million in 2009 to $371 million in 2012 while the net income rose from $67 million, or $1.48 per share, to $122 million or $2.61 per share during the same period. Moreover, the company is considered a cash cow that produces consistent positive cash flow. In 2012, it produced $170 million in operating cash flow and $159 million in free cash flow.

J2 Global Inc (NASDAQ:JCOM) currently trades at around $43 per share, with a total market cap of $2 billion. The market values the company at 10.3 times its trailing EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) and 4.9 times its sales. It has the lowest EBITDA multiple among its closest peers, Open Text Corporation (USA) (NASDAQ:OTEX) and, inc. (NYSE:CRM).

A cash cow with recent dividend initiation

Open Text Corporation (USA) (NASDAQ:OTEX) is an information management software company, helping its customers to manage content, increase customer engagement and operate more efficiently. Around 54% of its total revenue, $656.6 million, was generated from its Customer Support segment while the Licensing and Services segments contributed only $293.7 million and $257.2 million respectively. What makes the investment community pay attention to this company is its recently-initiated dividend.

According to CEO Mark Barrenechea, Open Text’s cash flow increased 20% to $117 million in the third quarter 2013 as a result of more efficient operation. For the full year of 2013, the company expects to reach the upper end of its adjusted margin target range of 26%-30%. Open Text felt that it already had the cash for business operation, capital expenditure and acquisition and as a result initiated a dividend of $0.30 per share. Open Text currently trades at around $71 per share, with a total market cap of $4.2 billion. The market values the companya bit higher than J2 Global Inc (NASDAQ:JCOM), putting its valuation at nearly 11 times its EBITDA. But its price-to-sales ratio is lower, however, at 3.13 times its trailing sales.

Salesforce – high valuation and high-priced acquisition, inc. (NYSE:CRM), a global leader in customer relationship management via the cloud, has quite a diverse customer base. No single customer has represented more than 5% of its total revenue for the past three years. The company generated most of its revenue from subscription fees for its services and from providing additional support to customers.

Recently, the company acquired the cloud-based digital marketing company ExactTarget Inc (NYSE:ET) for around $2.5 billion in cash. The offering price per share was $33.75, 52% higher than the company’s pre-offer trading price. After the acquisition announcement, Salesforce’s share price dropped to around $38 per share. The acquisition price seemed high, at 7.4 times its revenue, especially since ExactTarget Inc (NYSE:ET) has not produced any profit for the past three years.

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