2 Winners From The 'Hybrid Cloud'

Includes: DVMT, MSFT, VMW
by: Bret Jensen

UBS fresh off attending a big Data Center conference in Las Vegas is out with an interesting piece on the 'Hybrid Cloud' today. A hybrid cloud is an enterprise solution that combines some infrastructure that is built inside a customer's own data center, and some that is built in a public cloud computing facility.

UBS believes this solution is the wave of the future and believes the two tech firms listed below will be the biggest winners in this space.

VMware (NYSE:VMW) is the market leader by the large margin in server visualization software. This will be a key component of the hybrid cloud and the company should continue to book robust revenue gains. Current sales are rising in the low double digit to the mid-teens for this software maker.

Earnings are increasing slightly faster than revenue with earnings tracking to an 18% gain this fiscal year and projections from analysts for another 15% gain in FY2014. The company also has more than 15% of its market capitalization in net cash on the balance sheet.

The shares do go for more than 20x forward earnings which is why I prefer to play this growth by buying EMC Corp (EMC). EMC owns 80% of VMware and also has over $3B in net cash on its own balance sheet. These two items make up ~60% of EMC's market capitalization and the stock is a cheaper play at ~11.5x forward earnings and it also pays a 1.7% dividend yield.

Microsoft (NASDAQ:MSFT) is becoming the second biggest server visualization player and has two other web services (Azure and Office 365) that are running at more than $1B in annual revenues and growing rapidly.

The hybrid cloud is a tertiary reason to own Microsoft which has plenty of other reasons to own the stock. The company is in process of replacing its long tenured CEO which is being viewed positively by the market, especially if it gets Ford's Alan Mulally. Its recent launch of the first new Xbox console in seven years is going well and has already hit 2mm units sold. Its Surface 2 and Surface Pro 2 tablets appear to be sold out at the company's online store and physical retailers like Best Buy (NYSE:BBY) which is encouraging as well.

Mostly Microsoft is a good value play. The company has over $70B in net cash and securities on its balance sheet and it also pays a dividend yield of 2.9%. Revenues are growing in the 6% to 8% range and the stock sells for ~12.5x forward earnings, a ~20% discount to the market multiple. The shares appear much cheaper if you equate for Microsoft's net cash position (Under 10x forward earnings).

Disclosure: I am long EMC, MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.