“Time To Buy” part two — “Sky’s the Limit on This Tech GameChanger”

Sleuthificating Hilary Kramer's Cloud Computing play

By Travis Johnson, Stock Gumshoe, July 17, 2012

Yesterday we took a quick look at one of the stocks teased by Hilary Kramer for her GameChangers newsletter … and since I got started, I can’t seem to help myself, I’m going to go ahead and sniff out another stock teased in the same ad.

Why? Well, partly because the lovely Stock Gumshoe readers asked — and I am helpless to resist. And partly because it’s a cloud computing play, which is at least a real business trend that’s providing tailwinds for some stocks, and it doesn’t have anything to do with gold or oil. I know the “hard asset” guys dominate the newsletter business, but sometimes I get a bit tired of assay results and drill cores and cost-per-ounce and panic about spring breakup times and blah blah blah.

So … a regular old tech company. Bliss. Which one? Here’s the tease:

“Sky’s the Limit on This Tech GameChanger

“Cloud computing will revolutionize technology in the next 12-24 months.

“If you use Google’s Gmail, Amazon.com, iTunes or Facebook, you are already using cloud computing.

“Cloud computing is very simply web-based storage. It lets you store your files, pictures, emails and documents with a third party through the Internet. You can access your data anywhere, anytime. And you never again have to worry about maxing out the storage on your PC or losing everything if your machine goes kaput….

“While companies may still be cautious on IT spending, this is one area of technology they will gladly invest in. That’s because it saves money, and saves it so quickly that companies can recoup their investment in no time.

“70% of Chief Information Officers surveyed say they plan to migrate to cloud computing.

“Little wonder the cloud computing market is poised to almost triple in size to 16.7 billion in the next 24 months.

“I’ve alerted my GameChangers readers to buy a tech stalwart that is actually a stealth cloud computing play. It’s already a juggernaut in data storage, content management systems and information security. Now it is poised to grab the lion’s share of the explosive growth already under way in the move to the cloud.

“This stock is a rare triple play—it’s aggressively moving into an innovative new technology (cloud computing), gaining market share in its existing core business AND increasing profitability.

“Its role in the two megatrends in corporate technology today—cloud computing and big data—are translating into blockbuster profits.

“The company reported record gross margins, with a strong 32.4% jump in earnings for the third quarter and revenue up 14%.

“This success is allowing the company to both grow the bottom line and invest heavily in research and development—one of the hallmarks of a game-changer.

“The stock is a great buy at its current price, trading at less than 14X next year’s expected earnings. This is your last chance to get on board before the next leg up. Buy now—before Wall Street catches on.”

So … 32.4% jump in earnings, 14% revenue growth, “juggernaut” in data storage? Hoo dat? The Thinkolator found this one easy enough that I think I heard it chuckling a little bit behind my back, but we do have our answer: This is EMC (EMC).

Which is indeed one of the tech “Juggernauts”, with a market cap approaching $50 billion — and though it’s not going to double overnight, I’d agree that it’s one of the lower-risk plays on “cloud computing” because of their dominant position in data storage. Storage, after all, is one of the great keys of the cloud — if you want all your data to be cloudified and also easily available, you need to have good, managed, fast retrieval storage, which is EMC’s core business.

What has gotten more attention for EMC lately, though, is it’s separately-traded subsidiary VMWare (VMW), which is also a cloud computing play (and has been promoted as such by several folks over the years, most ardently the Motley Fool Rule Breakers gang — it has also been called the “almost perfect stock” by Louis Navellier at least twice).

And yes, they did post a 32.4% jump in earnings and 14% revenue growth, beating analyst estimates — though that was back in the fourth quarter. The most recent quarter brought 10% revenue growth and 23% earnings growth, still quite good but not as impressive (it did still beat estimates). They report their second quarter very soon, on July 24, so this could easily be a volatile period for the shares despite their established business and very large size.

If you’re interested in looking under the hood at EMC, today’s a pretty good day to do it — they’re all over the news because of rumors that VMWare’s CEO is on his way out and that VMWare and EMC are going to jointly spin off some of their “cloud” assets into a new company. Which, given the fact that EMC has held on to a majority of VMW shares over the years instead of selling them off, would probably mean that ownership in either company or in yet a third public company would just get that much more confusing to figure out.

I still prefer EMC to VMWare, though both are down a bit from their highs — EMC is the one that you can pretty easily argue is undervalued, with a forward PE now down to 11 and an expectation among analysts that they’ll keep growing earnings at almost 15% a year, though VMWare is certainly the faster growing company and its valuation has gotten somewhat more reasonable over the last couple years as it has “grown into” the share price at least a little bit (for a while back in 2010 it traded at a PE of 100, the trailing PE is now down into the 40s with forward estimates for a PE of 25 and expected earnings growth of better than 20%).

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The arguments against EMC seem largely focused on the fact that they’re the “less cloudy” of the two (EMC and VMW), since a large part of their business is high-end corporate storage that some folks think will be eclipsed by “generic” storage in the cloud. I’m not an expert on the storage business, but it strikes me that as more and more data moves into the cloud the cloud will have to become better and stronger and more secure, I expect there will still be a lot of business for premium providers, and though I’ve never owned the stock my basic sentiment is that EMC, like Intel (INTC) and Cisco (CSCO) and Qualcomm (QCOM) and Microsoft (MSFT), is probably still overlooked or underestimated as an old and stodgy tech name. People fear strong established tech companies more than they fear strong, established consumer products or industrial companies, just because of the perception that tech companies can be undone by an upstart innovator in a garage. Though that’s still an outside possibility for many of these companies, and they do have to continue to innovate, it’s really, really hard for a little company to take share from an EMC or a Cisco when these big companies with aggressive sales networks have gotten so adept at increasing efficiency, cutting costs, and acquiring little innovators before they become large enough to pose a problem.

It’s not a slam dunk, of course, and there are plenty of folks who have been disappointed with EMC in the past as this dominant storage company has often failed to reward investors — but they have a lot of cash, they are abundantly profitable, and I think they’re priced fairly for the growth that they’re currently booking, with a share price that has come down as analyst expectations have been lowered since last quarter. And who knows, maybe this rumored spinoff will help to “unlock some value” in Wall Street speak and help create another bubbly company as they did when VMWare was first spun off