|Shares Out. (in M):||25||P/E||62x||53x|
|Market Cap (in $M):||1,054||P/FCF||30x||23x|
|Net Debt (in $M):||-185||EBIT||25||29|
LogMeIn is a provider of remote access and collaboration software online. Its key products are as follows:
LogMeIn: A remote access program that allows users to access a device from another device. It is free, but the premium version (LogMeIn Pro) allows for sound and file transfers among other features for $69.95 / yr. The file transfer seems to be the key feature of LogMeIn Pro that users are willing to pay for.
LogMeIn Rescue: Similar to the other LogMeIn product, but it caters to IT support professionals who want to access client devices. It costs $1188 / year.
Join.me: This is LogMeIn’s remote conferencing platform. It offers the opportunity to display your desktop to up to 250 people with just a few clicks of the mouse. Like LogMeIn, you can upgrade to Pro for $150 per year which will allow you more professional features.
Investment Thesis: LogMeIn is going to face a dramatic increase in competition in the coming months and is therefore a short. This competitive threat is the primary reason to short LOGM.
In the consumer/smb space (90% of LogMeIn’s revenue), LogMeIn has been the go to free service. However, competitors are emerging. Most notably, Microsoft offers remote access functionality through Windows Live Mesh for free. This will be incorporated into Windows 8 later in 2012 (see http://news.cnet.com/8301-10805_3-20106037-75/microsoft-touts-skydrive-integration-in-windows-8/ or http://www.liveside.net/2012/02/05/windows-8-and-windows-phone-8-and-the-future-of-syncing-and-sharing/). Apple recently released the iCloud which should reduce the need for file transfers via LogMeIn Pro. Even Google is entering this market with remote desktop for their web browser, Chrome , which is now in BETA. Meanwhile, there are also a host of online file lockers (and not just the illegal Megaupload type) from competitors such as Dropbox, Google Docs, Microsoft Skydrive, Amazon, etc. all which will reduce the need for remote access to a desktop to get files which is the key feature of LogMeIn Pro – the product which generates the vast majority of LogMeIn’s revenue.
The net effect of all this competition should be reduced use of LogMeIn Free as integrated solutions from the big guys (Apple, Microsoft, and Google) show up. This will lead to less LogMeIn Pro subscriptions over time. As online file lockers become more popular, the primary reason for using LogMeIn Pro (file transfers) will also go away so the percentage of Free users that will be willing to upgrade to Pro should also decline over time. The company currently has 915k premium subscribers on 13.2 million total users. The proportion of pro users to free users has risen to 6.9% from only 3% a few years ago. It seems likely that increasing competition could reverse this trend with negative effects to LOGM’s revenues. Meanwhile, user growth at LOGM has significantly outstripped revenue growth over the past couple of years, suggesting substantial pricing pressure is a persistent problem. The company acknowledges low barriers to entry in its risk factors which does not bode well for long-term pricing power.
In the enterprise space (10% of LogMeIn’s revenues) there are well established competitors like Citrix (GoToMyPC) and Cisco (WebEx) that offer remote presentation and access. This area will remain competitive as the existing giants won’t give up share easily. LogMeIn seems unlikely to make substantial inroads in the enterprise.
Other red flags for LogMeIn’s business are as follows:
LOGM has clearly been lumped into the “cloud computing” valuation basket. It trades at 53x 2012 street earnings. If you use EV/EBITDA it is similarly insane at 25x 2012 street estimates. This is very interesting because it is actually the cloud that is going to destroy LogMeIn’s business in the end. Valuation alone is never a good reason to short, but with the aforementioned competition catalysts in the next year and a nosebleed valuation, LOGM seems a good risk reward here.