The Home Run In HR Software

By Aaron Levitt | December 11, 2011 AAA

Despite the persistently high employment rate in the United States, more firms are spending big dollars on human resources (HR). While traditional HR-based companies like Paychex (Nasdaq:PAYX) have garnered much of investor attention over the years, the real future could lie in cloud-based software firms. As corporations look to extract every bit of value from their employees, these software firms have seen their values explode. From tracking employee performance and collaboration efforts to checking on benefits and filling out expense reports, these cloud-based HR firms offer companies great "bang for their buck" and could provide investors much of the same. (For related reading, see LogMeIn Clicking In The Cloud.)

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Huge HRM Potential
At its core, cloud computing moves the heavy data processing away from an individual's computer and places it on a server farm. End users then access their data and programs via the internet. As broadband and 3G & 4G wireless technology has gotten faster, internet bandwidth has finally caught up to the necessary speeds at which on-demand computing can take place. So far, customers and businesses have really taken to the trend. Worldwide cloud services reached $68.3 billion in 2010, and analysts estimate that the cloud computing market in the United States will expand from its current value of around $40 billion to more than $240 billion by 2020. Analysts at Morgan Stanley (NYSE:MS) project that public cloud workloads will increase at an impressive 50% compound annual growth rate (CAGR) over the next three years. (To learn more, read Compound Annual Growth Rate: What You Should Know.)

The cloud computing format makes perfect sense for the human resources world. By using software as a service (SaaS) applications, firms gain valuable cost, energy and time savings. The application process can be done online and the software can analyze thousands of applicants to find the perfect hire. Employee benefits can be accessed and tracked offsite, payroll and attendance can automated and training gaps can be filled. Analysts at technology think-tank Gartner predict that by 2014, sales of SaaS HRM software will outpace new ERP-based purchases in Global 2,000 organizations. With such estimated demand it's no wonder why traditional ERP software firm SAP AG (NYSE:SAP) just paid nearly $3.4 billion for cloud-based SuccessFactors (NYSE:SFSF) or Oracle (Nasdaq:ORCL) paid $1.5 billion for Rightnow (Nasdaq:RNOW).

A HR SaaS Portfolio
With the potential long-term growth in the HR cloud sector, investors should take notice. The First Trust ISE Cloud Computing Index (Nasdaq:SKYY) tracks 40 different firms associated with cloud computing across the entire sector. So far the ETF has underperformed the broad technology sector, but could show outperformance in the long term. For investors looking for direct HR exposure, here are some picks.

Recently receiving an upgrade to "outperform," on-demand talent software firm Taleo (Nasdaq:TLEO), could be an interesting buy. Shares of the SaaS company rose nearly 20% on the same day that the SuccessFactors deal was announced. Analysts estimate that the company could be the next acquisition target in the space. Similarly, both Kenexa (NYSE:KNXA) and The Ultimate Software Group (Nasdaq:ULTI) operate in the same talent retention and recruitment space. These firms could become targets as well.

Perhaps the biggest play in HR cloud computing isn't a start-up, but an old tech standby. IBM (NYSE:IBM) has continued to make acquisitions in the space and dive deeper into data analytics. Ultimately Big Blue has the cash hoard and business know-how to succeed in the cloud. Investors may want to consider the stock as their go-to tech play. (For reading on IBM, check out The Most Innovative Companies.)

The Bottom Line
Going to the cloud has become big business and is only getting bigger. SaaS applications for human resources are a natural extension of the movement. For investors, adding exposure to the tech sub-sector could provide big long-term gains as more businesses move towards the cloud.

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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

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