Cashing in on Cloud Computing

Cloud computing was declared the ‘next big thing’ almost a decade ago – and the following revenue chart from IT market research firm the Yankee Group suggests the pundits were on the money.

A “cloud” relies on an outside source to undertake computing tasks.  A good example is Google Maps and Google Earth; these software applications located on Google servers and accessed via the internet, replace the need to buy individual mapping software for personal computers. Dropbox – a file sharing application that lets you store and update files from multiple stgices – is Cloud computing at its simplest.

From the chart above you can see the different levels – IaaS (information as a service); PaaS (platform as a service) and SaaS (software as a service).  At its core cloud computing is a simple concept.  Computing resources like infrastructure, platforms, and software are “leased” from an outside provider instead of bought and maintained by the user.

There are “public” clouds and “private” clouds with the latter being primarily for business or enterprise use.  For investors, that is where the opportunity lies.  According to the International Data Corporation (IDC), one of the world’s leading providers of market intelligence for the Information Technology Center, revenue growth from private clouds is expected to grow faster than public clouds.  Here is a chart from a 2010 IDC revenue growth forecast for the Private Cloud versus the Public Cloud:

Australia has publicly traded private cloud computing providers in the telecommunications sector.  These are data centre providers for companies interested in “hybrid” clouds where some computing resources are maintained at the business site and others are outsourced.  The following table looks at market cap and share price history of some of Australia’s most promising cloud computing companies:

Telstra’s cloud computing offerings are rarely spoken about by analysts who prefer to harp on about mobile penetration, margin compression and so forth.  Yet Telstra’s division responsible for cloud services – Network Application Services (NAS) – is expected to see some 70% revenue growth by 2015, according to a recent investor presentation.

With a 6.2% dividend yield Telstra is an attractive stock for income investors.  The company’s dividend yield has exceeded 6% in nine of the last ten years.  However, the company’s progress in its NAS business should put the stock on the radar of growth investors as well.

One of the concerns hindering private cloud computing growth is security.  Businesses need assurance that the data and applications stored in the cloud are safe.  TLS has partnered with Cisco Systems, Accenture, and Microsoft to achieve this.

Telstra’s P/E of 14.85 is slightly higher than the Telecommunications Sector average of 13.82.  Despite repeated warnings that the stock is looking pricey, investors continue to buy in.  Here is its one year price chart:

Singapore Telecommunications subsidiary Optus is Australia’s second largest telecommunications provider.  Optus got into cloud computing by acquiring Information and Communications Technology (ICT) Company Alphawest in 2005.  In March 2012, parent company SingTel stepped in to restructure the business.  SingTel has its own cloud provider, NCS (National Computer Systems) and the restructuring will allow Optus to offer NCS services.

SingTel has a solid dividend yield of 5.4% with an attractive P/E of 11.42.  A Forward P/E of 10.36 along with a P/EG of 0.76 and a 2 year earnings growth forecast of 15% are all positive indicators for the future of SGT.  Here is its one year chart:

TPG Telecom has rewarded shareholders handsomely – up 98%.  This movement came without the volatility of many ASX stocks over the past year.  Here is its chart:

TPG has pursued an aggressive acquisition strategy to further its low cost business model.  The company entered the cloud computing market in August 2011 with the acquisition of cloud provider IntraPower Limited, a company with 8 years experience offering cloud services to small and medium sized businesses.

Although TPG is a relatively new player, a 2 year earnings growth forecast of 29.5% and a P/EG of 0.61 should earn this company a space on any watch list.  The Forward P/E is 13.74 and the dividend yield is 2.2%.  This company has increased revenue and net profit every year for the past six years.  Historical performance suggests TPG could do well in its cloud computing efforts.

IiNet Limited is Australia’s third largest ISP (Internet Service Provider).  The company launched its first Business Cloud for SME’s in November 2011 with both Windows and Linux applications.  Security concerns should be eased by the company’s reputable partners – VMware, Juniper Networks, and IBM.

IIN has a P/EG of 0.56 with a healthy 2 year earnings growth forecast of 26.8%.  The current P/E is 15.03 and the Forward P/E is 11.03.  The company has increased dividend payments every year for the last seven years and the current dividend yield is 3.4%.  Here is IIN’s one year chart:

Amcom Telecommunications purchased cloud provider L7 Solutions in November 2011 to enhance its existing data centre and networking cloud services.  Macquarie initiated coverage in September 2012 stating the company is well positioned to see “double digit earnings growth” over the next few years stemming partly from the company’s cloud services.

Amcom has an impressive list of partners, including EMC, VMware, Cisco Systems, Microsoft, and Symantec.  Amcom’s L7 Solutions earned a Partner of the Year award from EMC in both 2010 and 2011.  Here is the company’s impressive one year chart:

Nextdc is a relatively new company, first listing on the ASX in 2010.  Their business is large scale data centres with four currently open.  They are fully independent and consider themselves “cloud enablers.”  This means any cloud provider can lease data centre space from them and enterprises interested in hybrid clouds can use Nextdc facilities for data storage only.

Nextdc has yet to show a profit and progress towards filling its newer data centres is slow.  Analysts at Citi noted the company is in “start-up” mode when it raised its target price to $2.49 in August 2012, based on progress on filling the centres.  Citi has a BUY, High Risk rating on the stock.

An Analyst at CIMB Securities lowered its price target to $2.26 in late September, citing slow progress in filling the centres.  The BUY call was maintained with the optimistic view it would only be a matter of time until customer commitments accelerate.

NXT is a stock to benefit from cloud computing growth in the entire market.  The stock price has had its share of volatility.  However, given the almost universal opinion that cloud computing will grow – Nextdc is a stock to watch.  Here is its chart: