“The No. 1 Cloud Computing Play for New Money” Motley Fool

By Travis Johnson, Stock Gumshoe, April 10, 2009

This ad from the Motley Fool has been around for a while, and they’re now giving away some of the teaser stock names for free — but they’re still keeping one “secret,” so I thought I’d revisit that part of the pitch and let you know who it is.

For those who don’t know what “Cloud Computing” is, you’re not alone — it’s essentially a move to a web-based application and storage environment, where all the programs you use and the data you store are actually on a server somewhere in the “cloud.” You’ll also hear references to “software as a service,” which is a variation of this probably best exemplified by Salesforce.com — software that you never download or tear out of a shrink-wrapped package, it just sits online, waiting for you to use it.

That’s a gross simplification, of course, but what the folks at Motley Fool Rule Breakers are essentially saying is that this cloud computing phenomenon is giving Bill Gates nightmares and may bring down Microsoft, and that this massive wave of innovation can lift your portfolio to new heights.

Instead of pitching this as just an email ad for a signup for Rule Breakers, they’re now giving much of it away as a free report (the report is here, FYI) — but not quite all.

The promise is that they will share with you the “Three Kings of Cloud Computing” — and they almost do. They talk in some detail about their first two “kings”, which are Google and VMWare, and then they go on to say that there’s a third company that stands out as “David’s No. 1 cloud computing pick.”

“David,” if you’re not yet drinking the Motley Fool Kool-Ade, is David Gardner, one of the founding brothers of the service (which essentially started life as an AOL chat board). David is the founding editor of their Rule Breakers newsletter, which searches out growth stocks according to a set of “rule breaker” criteria — these companies have to be “top dogs” and “first movers” in their sector, among other fairly conventional considerations, but my favorite requirement for one of David’s rule breakers is that he requires “documented proof that the financial media thinks it’s ‘overvalued.'” And that has certainly worked well for him on some picks, as he’s touted past momentum growers like Intuitive Surgical and Baidu in recent years, and before that AOL and eBay during the early days of the internet boom. Many of the picks he makes have already had huge runs of several hundred percent, and, as you might expect, many of them have a tendency to fall hard if and when the news or the market turns against them (including all four of those examples noted).

But that’s been a lot of blather to lead up to my main point, which is the secret teased stock they’re still hiding from your prying eyes. Here’s what they say about it:

“This Company Makes the Internet Fly….

“In fact, its potential currently outshines both Google and VMware — making it the No. 1 cloud computing play for new money.

“You see, it 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 [Nasdaq: AAPL], Microsoft [Nasdaq: MSFT], Sony [NYSE: SNE], and Nintendo [NTDOY.PK] are among its top clients — and they’re all more than happy to pay up for the quality this company consistently delivers.

“While this usually runs somewhere in the neighborhood of $275,000 per year, more and more complex applications are coming online all the time — giving this company even greater pricing power.

“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….

“And because it 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, you can understand why David thinks this will be one of the most dominant players in the cloud c