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Legal “Steroids” Are Making This Company a “Buy”

5 | By Michael A. Robinson

Technology companies are a lot like major-league sports stars in that they often post their best results early in their careers.

Athletes’ bodies wear out, and they can compete at the highest levels for only so many years.

With high-tech corporations, however, the challenge isn’t age or health. It’s that there’s always a group of young start-ups with hot innovations breathing down the Old Guard’s necks.

There are chances for late-career renaissances. Think of pitching ace Roger Clemens – who left the Boston Red Sox after 192 wins and 13 seasons in 1996, looking pretty rusty. Of course, Clemens found something that allowed him to go on and pitch for another 11 years – and win another 162 games.

What aging tech leaders need for their late-career renaissance is the business equivalent of a performance-enhancing drug – except legal.

I’ve uncovered four aging Silicon Valley legends that have found just that in a certain fast-moving tech sector.

And one of them, just like Clemens did, has rediscovered its ace-like prowess – and is making investors hefty gains in the process.

Let me tell you about it…

A $270 Billion Market

According to the forecasters at Market Research Media, the cloud computing sector is undergoing a compound annual growth rate of 30%. And by 2020, the industry will be worth $270 billion.

In other words, today we’re following Rule No. 3 of my five-part tech-wealth building system – “Ride the unstoppable trends.”

The “cloud” is just another word for the Internet. And so, cloud computing is the storage of and access to data and software over the Internet instead of your office’s network or your PC’s hard drive.

Cloud computing allows businesses and government agencies to cut way back on what they spend on their computer networks and IT departments. Instead, these enterprises pay vendors (the companies we’re going to talk about today) to host data, software and applications at remote storage “farms” and deliver it all back via the Web.

With a cloud delivery model, many companies find that it’s much easier – and cheaper – to pay someone else to deliver all that data rather than run their own elaborate computer networks. Plus, making sure corporate networks run smoothly and remain secure from hackers has gotten much more complex, because today’s workers use their smartphones and tablets just as much as they use their desk PCs.

While dozens of young tech firms are pushing the boundaries of cloud computing, the cloud has also turned out to be nothing short of a steroid injection for several aging tech leaders.

Let’s take a look at four that have done a particularly good job transitioning to a cloud-based business model – and one that I think will be a fantastic addition to your portfolio in 2015 and beyond.

Cloud Growth Winner No. 1

Autodesk Inc.

Autodesk Inc. (Nasdaq: ADSK), founded in 1982, is highly regarded for its 3D design, engineering and entertainment software. That last segment has especially burnished the San Rafael, Calif.-based company’s image – the last 19 Academy Award winners for Best Visual Effects used its software.

Moving Word documents, Excel spreadsheets and PowerPoint slide shows to the cloud is one thing. But Autodesk’s software are extremely complex products – the last sort you’d expect to find on the cloud.

But there you’ll find them – available for subscription.

Nearly three years ago, in April 2012, Autodesk CEO Carl Bass predicted his company would make a successful transition to the cloud, with 100% of its products available online.

And they’ve done just that.

In the fiscal 2014’s third quarter, ended Oct. 31, deferred revenue, which includes future sales from cloud subscriptions, rose to a record $1 billion. Quarterly revenue from cloud subscriptions rose 15% year over year to $298 million.

Autodesk also raised 2015 sales guidance three times last year. However, the company is still working out the cloud’s impact on profits.

During the third quarter, earnings fell by 80% from the year-ago quarter to $10.7 million.

Bass pins the decline on higher R&D spending and the effect of deferring sales over several quarters rather than booking them all at once.

Cloud Growth Winner No. 2

Adobe Systems Inc.

Founded in 1982, Adobe Systems Inc. (Nasdaq: ADBE) was synonymous with the rise of desktop publishing in the 1980s.

You almost certainly know the San Jose, Calif.-based company for its Portable Document Format (PDF) files. Its Photoshop program is still the industry standard for photo editing, and its Illustrator software is a top-rated package for graphic design.

But if you visit Adobe’s website, you wouldn’t even know it’s a company deeply rooted in software.

These days, it’s all about the cloud…

Specifically, the firm has had great success in converting sales to recurring subscriptions though its Creative Cloud platform.

The shift to a cloud-based model was a big factor behind Adobe’s earnings beat when it reported fourth-quarter results back on Dec. 12.

Adobe had adjusted earnings of 36 cents per share, 20% above analysts’ forecasts of 30 cents per share. It also beat on sales, which came in at $1.07 billion, compared with forecasts of $1.06 billion.

And those results mirror Adobe’s cloud sales – they came in at 644,000 new subscribers, more than 20% above analysts’ projections. For the fiscal year, Adobe grew cloud users by more than 130%, to 3.5 million

And for the future of Adobe, the firm also offers powerful cloud-based marketing tools for corporations that need to keep abreast of changes in social media and online and mobile. For the fiscal year, Marketing Cloud sales came in at $1.17 billion, 28% of Adobe’s total sales.

Cloud Growth Winner No. 3

Oracle Corp.

Of all the older tech leaders improving cloud sales, Oracle Corp. (NYSE: ORCL) may be the most surprising.

In 2009, then-CEO Larry Ellison caused a stir when he derided cloud computing as a lot of marketing mumbo jumbo. A video of Ellison’s sarcastic remarks quickly made the rounds on YouTube.

It also made Wall Street analysts doubt the Santa Clara, Calif.-based company’s commitment to increasing subscription sales and Web-based product deliveries.

But in the second fiscal quarter, ended Nov. 30, the 37-year-old company finally showed off its cloud bona fides. Oracle’s new cloud success helped the database management firm beat Wall Street forecasts for sales and adjusted earnings.

Sales rose 3.5% from the year-ago quarter to $9.6 billion, compared with analyst expectations of $9.51 billion. Adjusted earnings per share came in at 69 cents, a penny higher than forecasts.

Oracle cloud software offerings include applications for human-resources and sales departments. Those sales rose 45% from the same quarter a year earlier to $516 million.

Now serving as chairman, Ellison has become Oracle’s biggest cloud champion. He predicts new cloud bookingsnext fiscal year of more than $1 billion.

Cloud Growth Winner No. 4

Microsoft Corp.

After years of relying on PCs to drive sales of its software, Microsoft Corp. (Nasdaq: MSFT) has made an ace move to our unstoppable trend.

And the success couldn’t have come at a better time for this Redmond, Wash.-based company, which was founded back in 1975.

While global PC sales have stabilized, that comes after years of decline that cut into a big part of Microsoft’s growth plan.

Fortunately, the company has a new CEO who is clearly both more committed to cloud computing and more adept at wringing up sales in this category than his predecessor, Steve Ballmer.

Under Satya Nadella, who will soon complete his first year on the job, Microsoft has turned in an All-Star performance in the cloud.

The company’s primary cloud product for business clients is Office 365. Microsoft also offers a dynamic customer relations sales tool through its Azure cloud service.

That two-barreled approach has worked out great. In its first fiscal 2015 quarter, ended Sept. 30, Microsoft’s overall cloud sales more than doubled to $1.18 billion.

And that was just one of several improvements the company has made over the past year.

And as investors, we can find the results in the stock price. Over the past year, shares of Microsoft are up 25.5%, nearly three times the Standard & Poor’s 500 Index 9.3% return.

Indeed, Microsoft’s quick turnaround is why I keep talking about the company – and keep recommending it. In fact, its shares have gained 38.7% since I first suggested them to you back in September 2013.

And this late-career renaissance under Nadella is so important – to Microsoft, to the tech industry and to investors like you – that I want to follow up today’s talk by taking a deeper look at the company.

In particular, I want to inspect Microsoft under another lens of my five investing rules.

Keep an eye out for that column over the next couple of weeks. You won’t want to miss it…

Editor’s note: Are you invested in any other Silicon Valley legends undergoing a late-career renaissance? Do you see any other contenders out there angling for that status? Let us know in the comments below. We love hearing from you.

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5 Responses to Legal “Steroids” Are Making This Company a “Buy”

  1. Robert Estes says:

    In your e-mail you were going to talk about legal steroids, but you did not. you talked about other investments but you never got to the steroids??

  2. allan says:

    I am resisting the ‘cloud’ race. I like to have everything on my computer. There are advantages both ways, but it seems to me less likely to be interrogated and data ‘stolen’ from my computer than on some companys huge data base.
    I would like to be convinced otherwise. It seems to me that a unique password for each ‘clients’ files would have to have a ‘register’. Hack the register and bingo you have everyones files. On millions of private computers each one has to be hacked individually.
    Comments from those who know?

  3. Marnie Jacobsen says:

    I am interested in finding out more about AMAT which you were recommending purchasing before June 2014. What are your thoughts about this company now?

  4. James Farrar says:

    The utimate key to security is encryption for all paths, all storage and all users system entry. Central Cloud storage firms can afford far more in-depth protection than a local PC owner can.

    On the other hand, Terabyte storage locally can be totally disconnected from the internet, which is as safe as your home or office is protected. My local cloud is managed by an off the net PC with full encryption and a firewall, and a different encryption between my on the net PC and its firewall and the off net PC. I encrypt where I can to send data or messages on the net, using a third scheme. So, I suppose I agree with your local method. The off web PC and the storage is turned off unless being used.

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