As the technological shift starts to unfold and fully embrace the idea of the cloud, it becomes critical for investors to start their due diligence process to prepare for this transition. In other words, knowing which ideas will thrive for a chance at producing solid market-beating performances. If we learned anything at all from the tech bubble it was that, not every idea was going to work.
For every pets.com and etoys.com, there were indeed names such as Amazon as well as Priceline.com that survived. So it stands to reason that among the numerous successful possibilities with the cloud, there will undoubtedly be some failures as well. With that said, I feel inclined to focus on a few companies that I feel are adequately prepared to make this cloud transition. Here are five (in no particular order).
One of the pioneers and driver for the cloud movement is virtualization giant VMware. The company has dazzled investors with almost 75% of the server virtualization market share. However, it is hard to build a case for the company that it can still grow at the rate that it previously did - particularly on both increasing penetration of server virtualization, and at the same time compete with other firms in the virtual desktop market.
However, for VMware, its large share lead has placed a huge bulls-eye on its back from competitors such as Oracle as well as Microsoft. Both of which are intensely determined to secure their own footing in the virtualization market. While I appreciate that competitors will take different angles of attack on VMware and they may likely fail individually. But it is hard to imagine any company maintaining that size of share (75%) for any considerable length of time - especially in the technology sector.
One of the cloud pioneers is database giant Oracle. As the cloud continues to consolidate Oracle will remain one of the top players within the space as well as the enterprise. The stock took a slight dip last year when it disappointed Wall Street. But I think many overlooked the fact that Oracle had anticipated weakness in certain segments of its business and was focused on strategically positioning itself for the technological shift within the cloud - one that will allow it to maintain its dominance in the corporate enterprise sector for years to come. We have seen recent evidence of this strategy when it acquired RightNow, the cloud-based customer experience suite designed to help organizations deliver customer experiences across the web and social networks.
For Oracle, with the stock now trading just under $29 after having bounced off its low of $24.72 in August of last year, its growth projections currently place a valuation at $35 - this is even on the most conservative assumptions. The bullish case for Oracle is simple ... as businesses continue to strive for growth, it will place more demand on IT services. And as IT services get more complicated, it will require the level of expertise that Oracle provides to manage these complications.
It is hard to see how EMC isn't a bargain at today's prices. While the company is somewhat vulnerable to weakness at home and in Europe, and clearly needs customers to keep spending, data storage is a critical IT priority for many companies and should keep EMC in relatively better shape. Though the company also enjoys a strong share as well as a great reputation, one has to think that the competition will eventually catch up. Names such as Hewlett-Packard (HPQ) and Dell (DELL) come to mind in terms of the competitive threats.
Frankly, the bigger threat to EMC may not even really be on the board yet. Perhaps IBM or a chip company will find an entirely new approach to data storage and push the market ahead in one large leap. It has happened plenty of times throughout tech, and it does tend to either bury the old guard or at least neuter them with respect to growth. EMC could grow its cash flow at less than 5% from here on and still be undervalued by around 20%. Although, It will be hard-pressed to outperform if IT spending crumbles in 2012. However, today's price makes this look like a risk worth taking. Investors may want to wait a bit to see if the market strips out even more expected growth and valuation, but a price in the low $20s or lower is pretty enticing.
In a recent article, I made a case for why I thought Microsoft was ready to take on Apple. It seems there are very few analysts who share my optimistic view in terms of the company's long-term prospects. There is growing evidence that Wall Street does not give Microsoft enough credit for being able to transition itself with time accordingly - particularly with the cloud. But I think this is where a mistake is being made. The company understands and appreciates this reality and has been working to adjust accordingly - particularly with its efforts to make a more workable platform for mobile devices.
To that end, it has partnered with ARM Holdings (ARMH) to license its chip technology which is a different architecture than what it has been comfortable with Intel. All of this is on top of its Windows 8 launch, as well as its position for the cloud - something for which I feel the company is not sufficiently credited in the same breath as database giant Oracle and the aforementioned IBM as well as Google (GOOG).
I'm not proud to say that Salesforce.com has made me look extremely foolish over the past couple of years - mostly because of how it continues to defy all logic and common sense for its ingenuity and being able to capitalize on bringing customers and businesses together. Well, that's only part of the reason. The truth is, it has made many analysts look foolish for doubting its ability to grow and justify its enormous P/E. As an Oracle investor, it brought me much pleasure to dislike one of its main competitors in Salesforce.com, but I do appreciate that it is indeed a formidable opponent when it comes to the cloud.
From a stock perspective, the company continues to generate a following by a community of analysts because of its perceived expensive valuation. On that note, there are many who are waiting to be proven right. But it is something to watch as the downside risk remains incredible. It only takes one bad quarterly miss to cause the stock a 50% drop or higher in the stock price as its many bulls will want to immediately secure their profits.