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 …
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 …
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.