“3 Kings of Cloud Computing” Motley Fool

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This one has drummed up a fair amount of interest from the mighty horde of Gumshoe readers, I’ve been seeing it for a couple weeks now and it appears to still be actively pushed as I type.

So … you might like to know the names of these three cloud computing giants, no? Read on then, fair readers.

The Motley Fool is a company I have some fondness for, but they do drive me to drink with the absurd length of their typical email ads — even someone like me, with a pathological fondness for email hype, can sometimes be pushed past the breaking point. Thankfully, I don’t mind being driven to drink on occasion — much better than driving oneself.

So dig in we shall.

This particular ad is for the Rule Breakers newsletter run by founding Fool Dave Gardner, their most growth-focused service that has typically focused on biotech, tech, and other highly volatile sectors. According to Hulbert, this newsletter has slightly trailed the market for the past one and three year periods, according to the Fool themselves, they have beaten the market by about 12% since inception (I think this newsletter is five or six years old). So neither terrible nor ground-breakingly fabulous in recent years, which is probably not a huge surprise for a newsletter that doesn’t do much with energy or commodities. They have had some good picks, certainly, as almost every newsletter has (the big claims to fame for Rule Breakers include Intuitive Surgical and Baidu, among several others), though the growth and generally smaller cap focus of this newsletter almost promises that there will be a few huge winners over time, and probably many more significant losers — the big winners have to make up for failed growth stocks that collapse.

And David Gardner is apparently a big believer in cloud computing — the spiel for the ad is that this is what keeps Bill Gates up at night, and they weave in a nice story about Microsoft’s failure to capitalize on cloud computing, and the future growth of this technology.

When they talk about cloud computing, they’re essentially just talking about internet-based storage, services, and software — you’ll often see the term “software as service” associated with this, that’s what you have when you use software online that runs over the internet, not from your own machine (Salesforce.com is the poster child of this movement, at least in business services).

And they “give away” the first “King of Cloud Computing” — which, perhaps obviously, is Google. Google is very focused on delivering ads online, of course, but they also are building a capability to deliver applications and software online — the Google Apps package is a cheap competitor to Microsoft, particulary in office software like word processing and spreadsheets (in my personal opinion, the web-based software from Google is awfully balky at times and it would be frightening to use it exclusively if you were in a mission-critical project or in a big hurry, but I do use it, and they do have more advanced developments all the time). Even functions like Gmail are considered cloud computing by most, since the whole system runs off of a server somewhere, the software and messages are not saved on your machine.

And Google is the largest server farm owner, with the most incredible capacity to take on new tasks and storage, so as more info moves online it would logically make sense that they have a chance to benefit. The Fool says that buying Google today is “like buying Microsoft in 1990″ (yes, that would have been a really good decision — MSFT went for about 60 cents a share back then, 2000 would have been not so good, it got close to $60 a share, both prices split adjusted).

I own shares of Google and do use Google Docs and Gmail, just for disclosure’s sake.

The current jabber about cloud computing has actually been slightly negative, since both Amazon and Google have experienced significant technical problems and downtime in recent weeks (Google’s was with Gmail), but I’ll agree with David that the trend is certainly moving in this direction — we’re outsourcing everything else, so outsourcing storage, software, and data security is no surprise.

So … what are the other two companies that are expected to benefit from this “cloud computing” boom?

Here’s the spiel for the first one:

“When David first recommended it to the Rule Breakers community back in 2005, he admitted it wasn’t “cheap.” Since then, it’s shot up 150%…

“You see, this company works behind the scenes to make sure you can access everything the Web has to offer at lightning-fast speeds.

“And thanks to the ever-growing number of people now using the Internet to do everything from watch movies to buy houses, this once-flailing refugee of the dot-com meltdown is now one of the most important tech companies in the world.

“Apple, Microsoft, Sony, and Nintendo are among its top clients — and they’re all more than happy to pay up for the quality this company consistently delivers….

“At last count, it had more than 100 clients paying $1 million or more per year. So it’s no wonder that cash from operations has more than tripled from $83 million in 2005 to over $270 million today… Or that the cash on its balance sheet has grown from just $92 million to a whopping $208 million….

“…because this company is both a top dog and a first mover, it has been able to gain an almost insurmountable lead in market share, allowing it to sport superb operating margins. Gross margins currently sit at an incredible 77%; meanwhile, net margins have climbed to an all-time high of 17% — and continue to grow.

“All things considered, I think you can understand why David thinks this will be one of the dominant players in the cloud computing world for years to come.”

So what is this one?

You might have guessed it by now — especially with that bit about the company working “behind the scenes to make sure you can access everything the Web has to offer at lightning-fast speeds.”

Or if not, at least the Thinkolator is on your side … this one is …

Akamai (AKAM)

I owned shares of Akamai for a year or two — actually buying fairly near when the Rule Breakers folks did, probably, in 2005 sometime. I sold them all between $30 and $38 in 2006 and 2007, the shares are currently at about $23.

Akamai is a great company — that stuff about margins is all true, and they do have a who’s who list of clients who demand fast and secure web services, but they are not without competition. You’ll hear every few months or so about the next company that’s going to unseat Akamai, whether it’s Limewire, one of a host of similar companies that isn’t yet public, bittorrent or another entirely different technology, or just that they’ll be made unnecessary by a slimmed-down web that works faster without Akamai’s services.

I don’t buy that, but I do see that there’s certainly potential for more competition that might continue to bring down margins. Akamai, for those who don’t know the company, offers a few different services but their core offering is a network of local servers around the world. If you buy their services, they give expedited access on what amounts almost to a private internet, sending users to servers that are at their local ISP instead of to the company’s main server that might be on the other side of the country. This speeds up simple things like websites, but it really speeds up downloads — which is why iTunes has used it, and why the software-as-service crowd likes Akamai, too. I can’t pretend to understand their technology, but I did go into more detail on my (now largely defunct) personal blog a couple years ago if you want to read up on them.

I’m not up to date on Akamai, but if you discount the potential ravages of competition it’s certainly an easy argument to make that the demands of software and video serving online should continue to drive demand for their services. Analysts give them a very cheap forward multiple of 12, which is surprisingly low to me, but investors seem to have been cautious about these guys for the last year.

So what’s our third “King of Cloud Computing?”

“Not only does this rising tech superstar meet all 6 of David’s criteria for a classic Rule Breaker, but it also has a stranglehold on a niche market that’s absolutely essential to the future of cloud computing.

“Whereas the last company I mentioned keeps the massive amounts of Web traffic flowing smoothly and efficiently, this company designs extremely complex software that allows central servers to function in the first place.

“While the market for this software sits at roughly $1 billion today, it is estimated to soar to $5 billion by 2011 — an astonishing 50% compound growth rate.

“And thanks to various patents, a considerable head start, and immense technical know-how, there is very little chance competitors will be able to wrestle the lion’s share of that $5 billion away from this company.

“Over the past year, this company has seen its revenue climb 80% and its earnings climb more than 100%. Not to mention, returns on equity and invested capital have never dropped below double digits.

“But here’s what has really caught David’s attention…

“A recent shake-up in management has caused shares to tumble well below their fair value — giving investors who act now a rare opportunity to snap up an incredible growth stock on the cheap.”

I know, I know, you’re saying to yourself, “but Gumshoe, there aren’t many specific clues there … how ever will you solve it”

Clearly, my friend, you’ve forgotten about the hidden might of the Gumshoe’s Thinkolator — reserved for just such a challenge. This company is …

VMWare (VMW)

And man, was it on fire on Friday — even though they had a small technical gaffe recently, too.

VMWare is the dominant provider of server virtualization, and is credited with bringing this development to the mass market. And there is a big potential market for this technology/service — what they essentially do is enable companies to use their servers more efficiently by partitioning one server into multiple servers, thereby “virtually” turning one into perhaps four or five. They have a lot of competitors who are trying to catch up, but they have a big lead so far (analysts say they’ve got 5X the business of their next largest competitor in this market). This is indeed a “first mover”, with whatever advantages that might confer.

Those numbers, by the way, are from the December quarter — when VMW did have sales growth of above 80% (88%, to be precise), and earnings growth of “more than 100%” (122%, actually). The growth has tailed off a little bit, in the June quarter sales were up 60% and earnings up 30%, and analysts have cut their projections for next year, down from almost $1.50 a share in earnings to $1.20. The shares are trading at about $40 after their big recovery late last week, so this is certainly not a bargain basement pick based on current valuation — the trailing PE is a steep 66, and growth is slowing considerably. The shares had lingered around $35 for a while after the last earnings announcement, and hit a high of about $120 almost a year ago, not long after the spinoff.

Still, it is a fast grower even if the growth is not as fast as it was a few months ago, and if you can get a handle on how much it will maintain a competitive advantage against competitors like Microsoft, Citrix and others, maybe it’s worth the premium valuation.

Oh, and the management shakeup did have some folks concerned too, probably — they ousted their CEO, but I wouldn’t read too much into that. This was another company that followed this fairly common pattern, one CEO builds a company with R&D know how and nurtures the engineers and launches the products, and the board decides that a different type of person is needed when the company comes public and has to cope with a different kind of growth curve and focus. I have no idea whether the new person will be effective or not.

VMWare, as you probably recall, was the growth darling of Wall Street last year, and one of the more successful spinoffs in years as it separated from parent EMC. EMC still owns the lion’s share of VMWare, 80% or so last time I checked (and more voting rights than that), so if you like the broader storage and services sector at all it’s possible that you’ll find EMC to be a bit more stable and fairly priced than it’s precocious child VMW — this is not unlike the strategy of buying Cypress Semiconductor a few years ago because of their majority ownership of SunPower, though EMC is certainly held in much higher regard than the core Cypress business was back then. This is no secret, of course, people have been buying EMC because of their VMWare ownership both before and after the partial spinoff, so you’re not getting any secret info here.

So … not unknown companies for you today, but certainly these three are all high profile picks that are in enviable position if and when cloud computing grows into an economic force. I don’t know if the Fool is right in comparing cloud computing to the original buildup of the electric grid, but I’d tend to agree that yes, we will continue to see more software and services delivered online and fewer client-based programs in the future. That’s just a continuation of the current trend, and it’s no surprise to any tech analyst, so, as always, it’s important to understand the companies and their individual positioning, especially relative to competitors, before buying shares … even if you believe the cloud owns the future.

And … I’m realizing that, if my site statistics are correct, about 99% (OK, maybe 98%) of Gumshoe readers are on vacation at the moment — so dammit, I’m taking a break, too. I’ll try to get a couple more new writeups spooled for you so you don’t go through withdrawal while I loll about on the beach, but other than that StockGumshoe.com will be in summer reruns for a week and the Irregulars site will be bereft of new content (though I did add a bunch of notes this week — sold a few stocks and made at least one purchase), and I’ll probably be really slow to answer email. Enjoy!

I own shares of Google. I have owned both Baidu and Intuitive Surgical in the past, as you might have seen me comment on them, but I sold both several months ago. I do not have a position in any other company mentioned above.

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34 Responses to “3 Kings of Cloud Computing” Motley Fool


  1. That’s the best write-up of VMW’s prospects I’ve seen. Thanks! and thanks as always for your great detective work.

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  2. Great job – google was a given and I picked up on Akamai…but hadn’t seen through the muck to pick out VMWare.
    In case anyone’s wondering why the “other” big names aren’t in this bunch, they are NOT sitting on their laurels watching. The lab we worked with for the military to simulate Desert Storm with distibuted Sparc stations has been at it since then (Karlsruhe IT) and teamed up with some US companies to generate the next-gen killer apps for cloud computing.
    Latest write up here:
    http://www.techcrunch.com/2008/07/29/hp-yahoo-intel-announce-cloud-computing-research-initiative/

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  3. Help with understanding Cloud Computing:
    Myths about cloud computing are rampant in the IT industry. Here are eight myths that generally relate to vendors’ attempts to align cloud messaging with the historical products and services they provide. However, some of the myths are related to general misunderstandings and hype about the cloud.

    Myth Description
    No. 1 Cloud computing is an architecture or an infrastructure.
    No. 2 Every vendor will have a different cloud.
    No. 3 Software as a service (SaaS) is a cloud.
    No. 4 Cloud computing is a brand-new revolution.
    No. 5 All remote computing is cloud computing.
    No. 6 The Internet and the Web are the cloud.
    No. 7 Everything will be the cloud.
    No. 8 The cloud eliminates private networks.

    Cloud is not an architecture or infrastructure, because it is an abstraction for a relationship between the consumers and providers of services. That means that there are many approaches to cloud computing.

    Cloud Why Not Cloud Why Not
    Video on demand to your home Delivered service Point-to-point video over the Internet Feature of the network and devices
    FTP as a guaranteed service Service through the Internet FTP as an Internet function Feature of the Internet
    Storage as a service (for example, Amazon) Service through the Internet Storing files on remote servers Infrastructure function
    The Web as a service delivery platform Service through the Internet The Web and Web pages An interface layer
    Microsoft Managed Messaging Service Not appropriately scalable
    Cloud exists when someone takes responsibility for the delivery of a service or resource over the Internet or Web, rather than just uses the Internet or the Web.

    Cloud services are different from technology features.
    Today’s cloud offerings do not have strong-enough service-level guarantees.
    Technology vendors are often poor service providers.

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  4. I just received this same newletter yesterday — guess the big cloud computing run up hasn’t happened yet!

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  5. For the past year there have been teasers about ‘Cloud Computing’. I am in the business and one of the biggest issues is security of information. Think about it. Currently, as bad as Microsoft and its apps may be, cost wise, they are contained either on your PC or on your Company’s firewall protected Server and belong strictly to you and your company. If you were to be served and stored for products like Word, Excel and more advanced apps like Oracle or SAP, how would you be able to secure that most valuable data? Even Datacenters have to provide superb security, monitoring, backup, restore, and hazard protection. Where would your guarantees be and with whom? These are still issues that plague the Cloud world. I’m sure they’ll eventually be solved, but, until they are, there will not be a revolution!

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  6. I also just received this newsletter ad from Motley Fool today!!! I can’t believe they use the EXACT same wording 18 months later. Pretty misleading since it really makes it seem they are just coming up with this right now!!!

    “Of course, it’s only a matter of time before everyone else catches on, which is why I think you’ll want to get all the details right away…”

    Guess if they haven’t all caught on in 18 months, I can wait a little longer?

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  7. Here’s just 3 points the Motley Fool newsletter failed to mention:

    1. First off, Bill Gates and MSFT are cashing in on cloud computing simply by the user turning on their computer or thin client. Who do you think writes the software that operates your computer? You are most likely using Microsoft Windows or Mac OS X (AAPL).

    2. Ever try to do anything complex with Google Docs (writing complex VB Macros, creating a Pivot Table, integrating data from a database)? These are fairly simple tasks that any business needs which haven’t been addressed internet based software.

    3. Linux has been around for years. It’s open source, free and even has free productivity software that’s nearly as good as MS Office or Apple’s iWork. If corporations and individuals are going to go to cloud computing because of the price then why haven’t they adopted Linux already and saved millions of dollars?

    Cloud computing will affect businesses and individuals, but making money off of it is not going to be as simple as the Motley Fool makes it out to be. Furthermore, there is no way of predicting the next MSFT or GOOG.

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  8. Did anyone one notice the new “King of Cloud Computing” in the recent Fool email? Pretty sure it’s Salesforce! With around 50,000 customers, and the fact that it’s eating into SAP Microsoft and Oracle’s business. Also, they stated it’s trading at about 64 a share, and Salesforce is currently selling at 67. Kinda easy one to figure out, but I was curious to see what others thought.

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    • well for me it definitely is an next gen thing…it will take time to kick in. well the main concern is security of course but when resolved things will look brighter for cloud computing.. Banks do have safe lockers where customers do pay to keep their valuable b it docs or accessories. Its definitely safer to keep in lockers at the bank than at home.

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  9. I like vmw it has made over 30 dollars a share since 1 year ago today so they r doing something right,,,,,,but i think will level off and stay around the 50 dollar mark for some time and also drop when the market has the next hiccup.

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  10. I've seen Thin-Client promoted through various companies and channels since at least 1997. This is nothing more than large-scale networking. In my opinion, it's a good idea for storage, but I would not depend on it. Some of us will simply NEVER get over the idea that our valuable data is on someone else's server somewhere out in who-knows-where versus in our own building under the control of ourselves and/or our company IT department. Networking is great for interconnectivity, not so great for control and easy access to your data and applications.

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  11. Motley Fool's website still is displaying a big ad for this report. The #1 company they left out until you pay is, as the story above says, Akamai. I think it's absurd to be selling a report so old (and already proved wrong on several fronts). Shame on The Motley Fool!

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    • I think the guess about VM Ware is solid. They are doing very well and holding the market. They are expanding right now and have snagged some top designers for the Giant. I think this company will be a good investment for quite some time.

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  12. the three kings of cloud computing tell us so much information about cloud computing, and the kings such as google and akamai have so many usages for us, they have so many users and play an important role in the internet

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  13. Most recent (June 2010) ad by MF for Kings of CC was different from the 2008 version, only in naming VMW rather than AKAM. Is MF running out of ideas?

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  14. Wow… so glad I checked out some MF stuff I was sent. Their ads can be tempting fir someone who knows little to nothing of investing. But the question remains…If I now decide to check on the gumshoe's info, what might I find? ;)

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  15. >>Google "heroku or Nodally" – though I think they are both private.

    Okay, 16 weeks later I did this. The one result was… this post at stockgumshoe!

    >>PLUG POWER, should see 1000% by 2013.

    Perhumps… but as of Dec 14, 2010 it's at 0.3693, while the 200 and 500 day MAs are headed 45 degrees in the wrong direction. I could probably work "one fell swoop" in here, but…

    BTW, screw the damn' post office! Pay extra to get my check to Scottrade registered… and they lose it! (Or "loose it" as the online illiterates put it… frequently.)

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  16. I've been working with computers since 1961; Little did I know that the main frame I managed would become a "cloud" as remote terminals were introduced to access the corporate database stored and maintained on the centralized computer. Security was nominal until the internet and associated services enabled remote access to virtually any computer that is online.

    The most perceptive comment I've read about the cloud is about SECURITY. Expect substantial rain as hackers and viruses and trojans and worms and other forms of malware challenge the cloud servers.

    As the cloud(s) gather, I expect raincoat and umbrella sales to keep pace…:)).

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  17. Hi, Top article! Very well written and right to the point. I am referencing some of this blog in my own papers as a guide, I hope you don’t mind.

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  18. My biggest concern with cloud computing is security of information. The ad mentioned that the government would soon be using it. I find this statement a bit unrealistic. What do you think about security concerns using the cloud? Are they being addressed?

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  19. Here it is, almost May 2012, and the online ad for the “3 Kings of Cloud Computing” is still trying to make the info sound as if it is hot off the presses, exclusive, confidential…. when in fact, it appears that this report has been marketed for some four years already, if not longer. Way too much hucksterism in Motley Fool, methinks.

    Besides the data security concerns about the “cloud,” how about the fact that applications that run on the internet often seem to be less robust than equivalent ones that run on one’s own computer?

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  20. just came across this ad today… suprised to find how old it is. GooG has been doing the best over the last 12 months vs AKAM and VMW. Game over for PLUG

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  21. What about Amazon.com cloud service, as far as I am aware, Amazon was one of the early companies to invest and create their cloud service. It is the largest cloud computing company plus one of the best. Added to that Amazon strategy of selling their product very cheaply, even if they loss money in the early stage. Many companies already picked Amazon as their cloud company, all you have to do is search and you will be surprised. Another point which the report distorted is Microsoft. In the report it sound as MS has no cloud computing service, but ion reality their azure cloud computing is one of the fastsest growing cloud service in term of getting major companies on board. As far as I am concerned to recommend cloud companies, amazon and microsoft will be on the top of my list because of they already have an ecosystem unique under their label (that is not the case with google), most importantly as I mentioned above these two giants seem to be winning the game of “getting” big companies on board. As for the other two companies mentioned in the report, it will be the usual in that the giant tech like MS,google,amzon, IBM, oracle etc will destroy them and they do not have a chance to compete with amazon, as it is ten steps ahead of these companies. the report is biased. If you want to invest in the cloud the Amzon, Microsoft and probably IBM are by far the safest and the ones that are grwoing at great speed.

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  22. Thank you so much Gumshoe, you’re brilliant. They don’t pass fundamental analysis, do you think it wise to keep them in the watch list? A big bear hug,

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  23. This is SOOO old. The real uptick is where VMware is placing THEIR bets. This will be in software companies that can effectively use their provisioned servers: Google "heroku or Nodally" – though I think they are both private.

    Like(0)

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