In a column last week, I introduced you to the “stealth small-cap” – aging-and-slow big-cap tech firms that were rediscovering the fast growth of their small-cap roots … thanks to the newly emergent Cloud Computing trend.
Judging from the comments and correspondence I received, a lot of you were really intrigued by that concept – and by the huge opportunity for profits that the cloud was creating for investors.
In fact, Strategic Tech Investor subscriber Dionisios S. was so intrigued by that column that he asked me to identify some other “stealth-small-cap” profit plays.
What a great question.
The Cloud is such a broad and pervasive area of high tech that it offers us a stunning plethora of profit opportunities.
There are the “obvious” plays, like Amazon.com (NasdaqGS: AMZN) – the e-tailing tour de force that operates the Amazon Web cloud-hosting unit. And there are all kinds of “hidden” specialists – firms that provide everything from the specialized semiconductors used in high-speed servers … to the fiber-optic cables for broadband networks …to the printed circuit boards used in routers.
And that’s just on the hardware side of things.
There’s also the meshed “Software as a Service” – or “SaaS” as it’s known in technology parlance. There you have firms that provide cybersecurity applications as a service, that manage data, that control network traffic, and even offer the cloud-hosting services themselves.
Now you know why the market research firm Forrester says the business of cloud computing is going to grow from about $41 billion in 2011 to $241 billion in 2020.
Because we understand this immense potential, we have an advantage over the rest of the “investment masses.”
Indeed, it’s like we’ve been given a treasure map – that shows us right where the treasure is buried.
So let’s take a look at the stocks Dionisios and a few others asked about – with an eye toward gleaning what they tell us about investing in this surging part of the high-tech sector. And we’ll start with a well-known tech heavyweight.
EMC Moves Beyond Data Storage
Known largely for its top-flight data storage gear, EMC Corp. (NYSE: EMC) has moved heavily into cloud technology in the last several years. The Hopkinton, Mass.-based EMC now ranks as a leader in a segment known as infrastructure services, which includes storage, data backup and delivery of computer applications.
To snag new customers, the company touts its performance. EMC says it can deliver 25% greater cloud storage efficiency, 250% faster application performance and 10 times faster data backup.
Touting its raw power is a marketing strategy that seems to be working: EMC is gaining market share and is nothing short of a cash machine.
The firm generates free cash flow (FCF) of nearly $4.3 billion a year. Indeed, EMC recently announced its first-ever quarterly dividend, initially pegged at 10 cents a share. At the same time, it increased its share-buyback program by 500%, boosting it from $1 billion to $6 billion.
With a forward Price/Earnings (P/E) of 12, the stock trades at $24 a share. I project an 18% annual earnings growth rate, meaning profits could double in about four years.
Solar Winds A Much Better Pick Than Service Now
Dionisios wanted to know about two firms that are roughly in the same software sector. The first is ServiceNow Inc. (NYSE: NOW). I don’t want to spend a lot of time on this firm because its balance sheet is a disaster.
NOW trades at a whopping 180 times forward earnings, or 12 times the market’s average. And for that you get negative returns on assets (ROA), stockholders’ equity (ROE) and operations.
I believe you’d do much better focusing on SolarWinds Inc. (NYSE: SWI) Founded in 1999, the Austin-based firm got its start in information-technology services … but has moved into cloud offerings in recent years.
In particular, the fast-growing firm offers software that improves the efficiency of computer networks, including those of hosted data centers known as “private clouds.”
To step up its cloud offerings, SolarWinds recently bought the privately held Canadian firm N-able Technologies for $120 million. But investors thought the move would dilute SolarWinds’ earnings and the stock sold off en masse.
That caused a roughly 17% decline in the share price. At present, the stock remains volatile – and perhaps also vulnerable, given the overall market uncertainty we’ve seen this week.
In the long run, however, SolarWinds has a lot to offer investors. Last fall, Forbes named SolarWinds the “best small company in America.” The business magazine cited the $3 billion market cap firm’s impressive growth and its history of offering high-performance products as the basis for the honor.
And SolarWinds is a solid company and a solid performer. It has a strong balance sheet. And it has a 30% profit margin, an ROE of nearly 25% and grew its most recent quarterly earnings by 34%.
I’m projecting earnings growth of 28% a year, meaning profits could double in about 2.5 years.
Autodesk’s Move Cuts Costs And Software Theft
Strictly speaking, Autodesk Inc. (NasdaqGS: ADSK) is not a true cloud play. But it is another great example of what I call a “stealth small cap.”
The fact is that the San Rafael, Calif.-based Autodesk is moving to cloud delivery of its software to eliminate the costs of manufacturing CDs, and then having to ship them to clients.
Autodesk launched its cloud-based subscription service two years ago and now derives more than 40% of sales from this platform.
The $8 billion market cap Autodesk is a leader in complex packages known as computer-aided-design (CAD) software. These packages provide 3D modeling capabilities, and are used in the engineering, manufacturing and architectural markets.
Software theft has plagued Autodesk for years, and licensing software to users through the Web could greatly reduce this piracy – and perhaps even stop it altogether. Just eliminating software theft could boost sales by an average 20%, according to BSA/The Software Alliance, the anti-piracy trade group.
Autodesk had a weak first quarter because of interest expenses and the costs associated with adding more software subscribers. But I’m projecting a three-year earnings growth rate of 20%, meaning profits could double in a little more than 3.5 years.
NVIDIA Offers High Performance Graphics Processing
This $8.4 billion market cap firm makes some of the best graphics-processing semiconductors on the market today. Leveraging that expertise, NVIDIA Corp. (NasdaqGS: NVDA) developed a line of processors that fit into cloud computing.
The company refers to this field as “GPU computing,” which stands for graphics-processing unit. This area is focused on engineering and scientific applications. The approach lets users offload intensive calculations to the GPUs, allowing the application itself to run at optimum speed.
NVIDIA has aligned itself with cloud-delivery firms – including Amazon’s cloud-hosting business unit. It was a shrewd move for NVIDIA, given that Amazon dominates the field with a 35% market share for cloud-infrastructure services.
But NVIDIA isn’t taking any chances. It also works with SoftLayer, a privately held firm that International Business Machines Corp. (NYSE:IBM) just bought for a reported $2 billion.
That means NVIDIA is tightly aligned with the world’s top two cloud-hosting firms.
I like the performance stats. NVIDIA has a profit margin of about 13.5% and an ROE of nearly 13%. It grew first-quarter earnings by about 28%.
I’m projecting earnings growth of about 22%, meaning profits could double in about 3.25 years.
Given that we’re looking at a market sector researchers expect to grow to $241 billion by the end of the decade, we’ve barely scratched the surface of the Cloud’s potential with the five stocks we’ve looked at today.
This is going to be one profitable investing trend – and one where we’ll have plenty of opportunities to uncover the “double-your-money” stocks that are the Holy Grail of my wealth-building strategy for you.
These are the types of high-quality, growth-oriented investments I have in mind when I say that the road to wealth is paved with tech.
The global tech sector is without a doubt the world’s greatest wealth machine. And we’ll continue to work together to direct as much of that wealth right into your pocket.
Thanks to Dionisios and others who sent in these questions. I look forward to more collaborations with you all as we continue our search for tech-sector treasure …
See you next week …