by Tom Taulli | August 29, 2012 6:45 am
The tech world has no shortage of buzzwords, and one of the most en vogue today is “cloud computing.”
But while a simple dictionary can help you nail down “cloud computing,” pinpointing the definition of “cloud operator” is much more difficult — because so many diverse tech companies have declared themselves cloud operators. But if you’re an investor looking for the best way to profit off this massive tech movement, you can’t exactly take every one of these firms at their word.
So what is a cloud operator, exactly? When I look at the space, I look for a few key factors.
First, a company should get the majority of its revenues from the cloud. This means Intel (NASDAQ:INTC), Microsoft (NASDAQ:MSFT) and SAP (NYSE:SAP) are not cloud operators. They have products that leverage cloud technology, but that’s it.
Next, you should differentiate between the types of cloud companies.
One type is focused on building applications — these include names like Salesforce.com (NYSE:CRM) and NetSuite (NYSE:N). Essentially, these are next-generation software companies.
The other type is focused on the infrastructure side, building technologies that help to improve datacenters, which help deliver the applications.
For the most part, it’s the app providers that get the most attention, and in fairness, they’ve performed well. There also has been a spate of IPOs in the sector, like Bazaarvoice (NASDAQ:BV), ServiceNow (NYSE:NOW) and Proofpoint (NASDAQ:PFPT).
But infrastructure players often get overlooked, even though they pack some serious growth potential, as they’ll provide the building blocks for this next-generation technology. Three such players stand out on this side:
Founded in the late 1990s, VMware (NYSE:VMW) pioneered virtualization software, which essentially improves the performance of servers in datacenters.
Even though competition has emerged from players like Citrix (NASDAQ:CTXS) and Microsoft, VMware has been able to maintain its dominance. In fact, the company has leveraged its lush cash flows to enhance its technology edge. VMware recently shelled out $1.26 billion for Nicira, a top player in the trend toward the “software-defined data center,” which makes it easier to manage the flows of data at a fairly low cost.
VMware also has an extensive ecosystem, with more than 2,100 technology partners. They have a vested interest in the platform, which certainly creates a huge barrier to entry.
VMware also has been a steady grower. Revenues have increased unabated for years, and profits have improved in eight of the past nine quarters. That hasn’t resulted in soaring stock gains — VMW shares are up only 15% in the past two years — but investors still are convinced of the best, as the stock trades at a lofty 30 times forward earnings.
So long as technology moves to the cloud — which is likely to be the case — companies should be buying VMware’s software.
A major bottleneck in the datacenter is storage, but Fusion-io (NYSE:FIO) has answers. These solutions involve the use of Flash, which greatly increases the speed of data flow and allows systems to focus on core functions. Fusion-IO customers often realize more than 10x performance gains.
As a result, Fusion-io has snagged big-time customers like Facebook (NASDAQ:FB) and Apple (NASDAQ:AAPL). The company also has pulled off some impressive partnerships, such as a recent deal with NetApp (NASDAQ:NTAP).
Growth has been sizzling for the past three years. In the latest quarter, revenues spiked by 82% to $359.3 million, and operating cash flows came to $34.8 million; however, the company still is struggling with profitability.
However, that’s no reason for gloom — earnings have lagged because Fusion-io continues to invest heavily in its technology. For example, its ioDrive2 platform — which should be a key growth driver for the next year or so — is getting lots of traction because of its performance improvements.
Infoblox (NYSE:BLOX) developed an appliance that helps manage datacenters. Some of the functions include network configurations, security and monitoring — all done in real-time.
Needless to say, this is attractive to a host of Wall Street firms. Infoblox boasts around 5,400 customers, including Caterpillar (NYSE:CAT), Johnson & Johnson (NYSE:JNJ) and Boeing (NYSE:BA).
Infoblox also is steadily growing revenues, with the most recent quarter’s figures growing 37% to $43.4 million — though again, profitability is a problem. BLOX went public at $16 per share before spiking to above $21 — shares listed before recovering to around that same level.
BLOX trades at a reasonable 6 times price-to-sales. Other fast-growing infrastructure players, like Palo Alto Networks (NYSE:PANW), usually have multiples well over 10X.
Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.
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