Since I published my article about the war in cloud computing in August, some new developments have occurred that may have significant impacts on the industry. 7 companies are offering particularly interesting opportunities and potentially good entry points for investors now basing on their recent developments related to cloud computing.
Benefitfocus, Inc. (BNFT):
The hottest news in the industry last week was the IPO of Benefitfocus, a provider of cloud-based applications for employee benefits management. The company's IPO was over-subscribed by 10% and priced at $26.50, two dollars above the high end of the originally targeted range of $21.50 to $24.50. Even such a high price was not enough to decrease the huge appetite of enthusiastic cloud-loving investors-the stock gained over 100% within a couple hours of its debut! Even the three big investment banks running the IPO probably did not expect that kind of performance. With a current price of $50 and with over 24 million shares outstanding, the company commands a market capital of more than $1.2 billion! Although the company's M/S (market capital to sales) ratio of 13 (basing on numbers obtained from the company's S-1 filing) appears high, it is actually not even close to that of its main competitor, Workday (WDAY), with an outrageous M/S ratio of over 40! On this basis one can argue that Benefitfocus is undervalued.
So, why are investors so bullish about Benefitfocus's future? The company said in the S-1 filing that spending on the company's two main product segments - insurance software and human resource software - totaled over $114 billion in the U.S. today and is still growing fast. It will be interesting to see how much of this huge pie Benefitfocus can grab and whether the company can further expand to other enterprise SaaS fields and steal customers away from Salesforce.com and other big cloud companies. If you believe in the company's potential, watch for any sizable pullbacks of the stock (5% or more) for buying opportunities.
Next up is Cisco, which invested $10.5 million in a cloud log file management provider called Loggly (it was not clear how big Cisco's share was). Many big computer companies are scrambling to find any competitive advantage in cloud computing. Log file management is believed to be one of the most important issues for cloud data centers. That's why VMware (VMW) announced a new product called vCenter Log Insight in July. The difference, according to Loggly, is that vCenter Log Insight is oriented toward existing VMware enterprise customers while Loggly's product services all companies that were born on the Web or are units of large companies doing business on the Web. The business opportunity in this specialized service is huge. Loggly's product has only been on the market for 3 years, yet the company saw its revenue grow fivefold last year! Loggly charges $49 per month for the Developer version of the service, $349 a month for the Production version, and $2,600 a month for the highest version. Too bad that public investors cannot invest in Loggly right now because it is still a private company, but Cisco stands to benefit tremendously from its shares of Loggly. So, for early-birds who want to invest in this new business, Cisco may be a good conduit.
In July, Overland signed a major cooperation agreement with Sphere3D (Toronto Stock Exchange Symbol: ANY), a cloud computing company with proprietary and patented technologies that offer its customers a platform for truly hardware and platform independent remote application accessing. IT industry experts at Frost & Sullivan and Seeking Alpha member "vangorilla" both gave Sphere3D very high marks in their research reports. Overland CEO Eric Kelly was extremely bullish on its partnership with Sphere3D during its last earnings conference call.
On September 16 Sphere3D announced that it is going to make a grand launch of the highly anticipated cloud version of Corel Office next month. In the beginning it will only be available for iOS users but probably will be available soon to users of devices running Windows, Android, and other operating systems because the company has a goal of making its cloud applications runnable on all platforms and devices. Considering that Microsoft is charging between $140 and $400 for standalone versions of its Office suites and $100 per year for its cloud version (Office 365), and that Corel is charging $50 to $380 for standalone versions of its Office Suites, Sphere3D's cloud Office product, perhaps to be priced around $30 per year (this is just my guess), should be quite attractive to the more than 1 billion current Microsoft Office users and 100 million current Corel Office users. Overland stands to gain from Sphere3D's commercial launch of its first major consumer software next month. It will also gain if Sphere3D signs any major contracts with enterprise customers possibly in the near future. As Overland's stock is trading at a 52-week low of $1, now might be a good entry point.
Earlier this month Salesforce Cut 200 marketing cloud jobs, about 10% of the labor force it acquired from ExactTarget in the summer. Salesforce.com CEO said: "Combining ExactTarget with our existing marketing cloud is providing greater level of synergies. And as a result, we are reducing our total headcount by approximately 200 people." This unexpected cost saving is great news for its investors because Salesforce.com paid $2.5 billion to acquire $120 million of incremental revenue from ExactTarget and anticipated to pay standard integration costs and transaction fees in the range of $40 - $45 million for this acquisition. Any additional cost savings will shorten the payback time from this acquisition for Salesforce.com. Salesforce.com did not say exactly how much the total salary of these 200 people was. According to Indeed, the average salary of all cloud computing jobs is about $100K. Assuming this figure is about the average for these 200 people, the total cost savings and addition to net income will be $20 million a year. The fact that Salesforce.com is able to slash so many overlapping resources may add extra fuel to the already hot M&A activities in the industry. If you believe that the market has not fully priced in the bonus addition to Salesforce.com's bottom line and the long-term benefits of the acquisition of ExactTarget, now may be a good time to initiate a long position on the stock.
In the end of August, VMware announced a slew of newly-introduced products, including VMware NSX, VMware Virtual SAN, VMware vCloud Suite 5.5, and VMware vSphere with Operations Management 5.5 for its software-defined data center architecture. VMware put in a tremendous amount of capital and resources to push forward its data center business over the past year, with a goal of pulling all hosting and integration of public and private clouds into its data centers (and thus sucking in billions of dollars of new revenue). The fruit of VMware's efforts is yet to be seen as its revenue has pretty much stagnated for 2 - 3 quarters. However, the new products of its data center family do enhance the capability of its data center architecture and may be the last selling points that convince more enterprises to use its service. VMware NSX and Virtual SAN are particularly powerful and important new weapons for the company. According to VMware, NSX is a network virtualization platform that can create a huge virtualized external network and greatly simplify all network management tasks for a client. Virtual SAN is a software-defined storage tier that can pull all data storage resources in a network or networks to create a huge virtualized storage pool for users and applications. With these two products, VMware is essentially telling all companies to either hand over the work of creation, management, and usage of their computer networks and data storages to VMware, or just host all their applications and data on VMware's virtual network and forget about ever buying a single computer in-house. Other companies such as Microsoft (MSFT), Citrix (CTXS), and Brocade (BRCD), which offer cloud-based data center services, need to monitor closely how well VMware's new products are received by the market. I believe that VMware has gained grounds against competitors after the releases of these new products. Other things being equal, the stock deserves to be priced at a higher level.
Speaking of cloud-based data centers, Microsoft is spending a gigantic amount to balloon the total capacity of its global data center infrastructures to support its products and services which store data on the cloud-Azure cloud, Xbox Live gaming service, SharePoint Online, SkyDrive Pro, etc. With the 9.4 megawatts of critical power from newly leased data center spaces in California and Virginia, Microsoft is now the biggest data center tenant in the world. Microsoft has leased more than 21 megawatts of data center space in the last 15 months! As it is to the traditional physical storage business, economy of scale is critically important to the cloud storage and data center business. Size definitely does matter. Therefore it is no wonder that Microsoft is not hesitant to use one of its richest resources-a mountain-high pile of cash-to build and buy up data center capacities in order to try to beat Amazon (AMZN), Google (GOOG), VMware, and Citrix to be the largest cloud-based data center provider in the world. As "flexible" as proponents may claim the cloud to be, the fact is that most companies will rarely change the hosting of its data storage and virtual network services from one cloud provider to another because of the associated cost and risk of business disruption involved in migrating from one virtual data center to another. Given this limitation, the strategy of all of these cloud giants apparently is to lure as many mid- to large-size enterprise customers in the world into their cloud data centers as fast as possible, before most of the fish in the pond are caught. Microsoft is moving quickly forward, and now it is time for its major competitors to speed up. Although Microsoft has gained over 20% this year, the stock may be a good investment now because the momentum of the company's cloud computing products seems to be accelerating.
Google is one of the dominant players in the public cloud field right now and keeps on investing a large amount of energy and capital to advance its public cloud service. Aiming to take more customers away from its major public cloud competitor, Amazon Web Services, Google recently bolstered the security and backup functions of its cloud storage service. Security of data on the cloud has been put on center stage lately due to Chinese hackers and the Snowden incident. Google uses the slower but more secure triple-encryption process (breaking the key into three pieces and then encrypting the data three times), which is more than enough to protect data from individual hackers and most government agencies' regular snooping. As for backup, the new function of differential snapshots Google now offers is great for both Google and its cloud storage users. It lets a user create an "incremental backup" that contains only the data that was added or changed since the last backup. It will take less time and save a lot of storage space (compared to making a full backup every time) for backup files on its cloud system.
In order to speed up the creation of either enterprise or personal applications based on its cloud platform, Google is pulling out its old trick again: inviting all software developers in the world to write applications for it (rather than writing the programs by itself) in its latest Google Cloud Developer Challenge. If any great new hits are created out of this competition, Google will enjoy good additions to its revenue. Like Microsoft, Google seems to be gaining momentum in cloud computing. Its current stock price of close to $900 may seem to be expensive, but its P/E ratio of 25 is reasonable for its current growth rate. It might not be long before the stock eclipses $1,000 mark when investors see its revenue growth increase due to increasing revenue from cloud computing services and applications.
Additional disclosure: I am also long Sphere 3D (Toronto Stock Exchange Symbol: ANY). No content published as part of this article constitutes a recommendation that any particular investment, security, portfolio of securities, transaction or investment strategy is suitable for any specific person. I am not an investment adviser, and the content contained herein is not an endorsement to buy or sell any securities. Your investment decisions are made entirely at your discretion. By reading my article, you acknowledge that I am in no way liable for losses or gains arising out of commentary, analysis, and or data in this article.