Cloud Computing's Stealth Beneficiary

By James Brumley | January 18, 2011 AAA

If the term "cloud computing" doesn't give you a little shot of trading adrenaline, then you're one of the few. The industry's stocks were on fire in 2010, with SalesForce.com (NYSE:CRM) and VMware (NYSE:VMW) rallying 105% and 107% respectively. And, with the growth outlook for 2011 being just as strong for 2011 - Gartner is looking for a 16% improvement in cloud revenue - it's tough to say the party's over.

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On the flipside, the obvious plays in the industry may have doled out the bulk of their potential gains.

For instance, VMW shares are now priced at 55.5 times anticipated earnings for the next four quarters, not that a P/E ratio fully illustrates a growth-oriented story. SalesForce.com shares are trading at 112.4 times 2011's expected earnings. To both companies' credit, we've seen more earnings beats than not over the last several quarters, but the pace of the buying seems to have outpaced the actual growth in income. Perhaps if it were 1999, the frothy numbers could be dismissed, but not in 2011.

Bridging the value/price gap here is euphoria and optimism. It'll be tough, however, for either of these companies to foster enough euphoria to hold the stocks aloft for several months - maybe even years - while earnings catch up with valuations.

That said, the projected growth of cloud computing spending is what it is, and as such, investors should consider tapping into it. There are a handful of stealthy ways, however, to tap into the trend without paying a fortune for exposure.

Follow GE's Lead
On the surface, General Electric's (NYSE:GE) recent $520 million purchase of Lineage Power may be dismissible as a mere matter of convenience for the company. The amount is a drop in the bucket for a company with $78 billion in cash on hand. There's a subtle clue in the acquisition though - it gives GE an entry into the power infrastructure market that will ultimately be needed to run all the servers that make up the cloud.

Were it just the Lineage Power buyout, that may be an arguable idea. That acquisition follows General Electrics' $3 billion purchase of another energy infrastructure company called Dresser.

Get the hint? The electricity needed to run cloud computing is the industry's stealth opportunity. In fact, a whole host of budding technologies like solar power, health care technology, and defense now need power management technology, though cloud computing needs are leading the way.

Unknown and Undervalued Picks of the Litter
Vicor Corp. (NASDAQ:VICR) is one of the off-the-radar ways to step into the trend. In fact, it's so far off the radar, analysts have largely avoided the stock despite its $632 million market cap. Bluntly speaking, analysts are missing the boat. Last year is on pace to be the best year ever for Vicor, in terms of revenue and profits.

Power-One Inc.(NASDAQ:PWER) is another one of these power conversion equipment-makers few people have heard of and even fewer have thought to invest in (though the following here is still bigger than Vicor's, even if the opinion is only a mediocre one).

Power-One didn't just swing to a profit in 2010, it did so with a vengeance. Following a harsh 2009 loss of 74 cents per share (though even without the one-time expense it would have still lost money that year), the company is expected to report full-year earnings per share of $1.01 once we hear fourth quarter numbers. That's the company's first full-year profit, and it came on the Power-One's best-ever revenue. PWER is now trading at only eight times 2011's expected income.

The Bottom Line
The message is becoming clear: The combination of new and growing technologies like cloud computing, plus a rebounding economy, are driving the need for better electricity management. While Power-One and Vicor don't yet qualify as the go-to names when the cloud needs to grow, both are well-positioned for cloud's growth and the growth of many other budding industries. (Is Salesforce.com's P/E Ratio Justified? For additional stock analysis, see Is Salesforce.com's P/E Ratio Justified?)

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