The Power in Cloud Computing
A Great Cloud Computing Stock
While Thomas Edison is arguably the best-known American inventor, a cult following has grown up around Nikola Tesla, the Serbian engineer whose skills as an inventor, perhaps superior to Edison’s, were undermined by his inferior business sense.
And this cult MAY have reached its peak on June 29, when the electric car company named Tesla Motors came public, raising $226 million from investors large and small who see great profit potential in the business.
I say MAY because there’s a POSSIBILITY that it will be years before this stock (TSLA) closes higher than it did on its very first day of trading.
And I say this because of three basic facts.
First, while every other automobile company on the planet has a market capitalization of LESS THAN one year’s revenues—they range from 33% of revenues for Ford to 59% of revenues for Honda—Tesla’s market capitalization is now more than $1.9 billion, which is more than 17 times revenues. In other words, TSLA is 38 times as expensive as the average automotive stock.
Two, while the company has posted cumulative revenues of $148 million by selling 1,063 two-seat electric sports cars (currently priced at $109,000) to customers in 22 countries, it has yet to make a profit, and it has no proprietary technology that can prevent other companies from competing, especially in higher-volume lower-price mass markets. In fact, it now looks like there will be a substantial time gap (and thus a revenue gap) between its two-seat Roadster and its four-door Model S (priced at $56,500)—promised for delivery in 2012; driving into this gap will be the Chevy Volt, the Nissan Leaf and others.
Three, and most important, the stock’s chart isn’t going up, which tells me that the public’s appetite for the stock has been satisfied for now.
Now, I hope I’m wrong. I admire Tesla’s Roadster, impractical though it is for my lifestyle. I’ve toyed with the idea of reserving a Model S. And I do expect to see some Teslas on the road in the years ahead.
After all, there’s already serious money behind the company. Elon Musk, the founder of PayPal, is a major investor as well as the company’s CEO; he’s in for about $75 million. Also on board are Google co-founders Sergey Brin & Larry Page, former eBay President Jeff Skoll, Hyatt heir Nick Pritzker, Daimler AG, Abu Dhabi's Aabar Investments, numerous venture capital firms, and the United States Department of Energy, with $465 million from its Advanced Technology Vehicles Manufacturing Loan Program.
Also, management’s decision to launch with a high-priced niche product—the same model used by the electronics industry—and then grow by driving costs down and targeting larger markets—has proven smart. Hopefully, they’ll make many more smart choices in the years to come.
But it’s important to remember that the stock is not the company. Even if the company does well, the stock may not.
The ideal investment, in my book, is an unheralded company whose products are in increasing demand, whose profit margins are large, and whose public perception grows as its business succeeds.
The risks of investing in Tesla today are that the company is already well-known, and well-thought-of, thanks to its A-list connections, and that increasing competition may make the road ahead bumpier than anticipated.
If I had to invest in a car company, I’d invest in the one with the strongest chart. That’s Ford (F), which broke out to recent highs on Thursday and Friday after a great earnings report and is the cheapest of the bunch.
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But I’d rather not invest in the automotive industry, where high debt levels remain a problem and profit margins seldom top 5%.
I’d rather invest in an industry that’s booming, an industry where the profit margins are high and the stocks are strong.
Today, the industry that best fills the bill is ”cloud computing.”
Which is what, exactly?
Well, there is no “exactly.” Cloud computing, in general, refers to the increasing migration of computing resources (hardware, software, data storage, computing power and expense) away from the user and toward a provider … who might be located all the way across the country.
Cloud computing thus minimizes upfront financial expenses for users, while maximizing computing capability. Users typically pay using one of two models. They can pay based on usage, as you do for your electricity service. Or they can pay a set monthly or annual fee, as you do for your cable TV.
In some respects, the evolution of the computing industry is akin to that of the electric industry long ago. Originally, electric power was consumed where it was generated. Eventually, the build-out of the electric grid allowed the concentration of generating facilities as well as the distribution of consumption.
Now, how far this trend to cloud computing will go, no one knows. Will all data be stored at big central locations eventually, or will we continue to control some locally? All you need to know today is the trend is powerful, that numerous companies in the (admittedly roughly-delineated) industry are enjoying rapid growth of both revenues and earnings, and that many of their stocks are strong.
I’m keeping an eye on eight of them right now.
One provides “scale-out network-attached storage systems.”
One provides “application acceleration services.”
One manufactures “network storage and data management hardware.”
One provides products and services that “improve the accessibility of data over wide area networks.”
One provides “enterprise mobility software that enables secure access to data, voice and video applications over networks.”
One provides “on-demand customer relationship management software.” Yes, it’s the famous Salesforce.com (CRM).
And one provides “virtualization software that enables organizations to run multiple operating systems on a single computer.”
Some of these I’ve written about before and some I’ll write about again.
But today I want to focus on Acme Packet (APKT), the market leader in the “session border controller” industry. A session border controller is hardware and software that allows real-time communications across different IP networks, whether the content is voice, video or plain old data. These networks might be wired, or they might be wireless.
The company also makes session-aware load balancers, multiservice security gateways and session routing proxies.
Obviously, there are not household items. The biggest customers for this equipment are telecommunications companies, including Alcatel-Lucent and Nokia-Siemens. But if you consider the growing amount of IP networks and traffic traveling on these IP networks, and the prospect that this growth can continue for a very long time, you’ll understand why revenues have grown every year since the company’s first sale in 2003, why they grew at an impressive 65% rate in the first quarter, and why analysts are now projecting that earnings will grow 94% for the full year! Also, profit margins hit a very healthy 20.9% in the third quarter. And that’s a profit margin the folks at Tesla can only dream about.
I wrote about Acme Packet here back on May 10, when it was trading at 26. After that it pulled back to 24 several times, but it’s been generally trending higher, propelled by the buying of investors who are learning about its great growth potential.
If you bought it back then, congratulations. I suggest you hang on tight.
If you didn’t buy, and you think you’d benefit from hearing the fuller story—as well as getting regular updates, so you know when to sell—I suggest you take a look at Cabot Top Ten Report, which first recommended the stock in March when it was trading at 17.
For more on Acme Packet and other top stocks, click here!
Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory