How to Boost Your Portfolio With Cloud Computing

Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

For several years we have seen the growth of virtual, or “cloud based” computing in data and other application forms. I wanted to take a look at a few companies with big bets on cloud technology.

Telecommunications giant AT&T's (NYSE: T) primary cloud subsidiary is known as Synaptic Hosting. AT&T touts it as a “complete, managed IT ecosystem for you to load and run your applications.” The unit focuses on a pay as you go model, and is perhaps best known as the official provider to the 2010 U.S. Olympic Committee.

Overall, AT&T had a solid, if unspectacular third quarter. Revenues were essentially flat in the third quarter versus the year earlier quarter, and earnings grew very modestly to $3.7 billion. Per share income of $0.62 was up 5% from the year ago quarter, largely on the back of fewer shares outstanding due to AT&T's multi-billion dollar stock buyback plan. Management has authorized a total 600 million share buyback during the past twelve months. All figures are net of the company's sale of its phone book business, known as “Advertising Solutions,” in May of this year.

The concentration of AT&T into three core operating companies continued, as combined, the company's landline, wireless, and IT Services provided 81% of revenues. The wireless unit in particular performed well, with revenues up 6.6% over the year earlier, and “churn” was at an all-time third quarter low.

On balance, today's AT&T is an extraordinarily stable, income oriented stock. It has its hands full rebuilding damages caused by Hurricane Sandy. But with its strong cash flow, expected to be at least $18 billion this year, aggressive share buybacks, and a safe, 5.1% yield, this company is highly appropriate for long-term income seekers.

Google (NASDAQ: GOOG) is probably the best known provider of cloud services. As much as anything, what has allowed that status is the view among many people that no one knows the Internet quite as well as Google does. Its principal cloud business is its “Google Apps” platform, and vast client roster, which includes everyone from small businesses, to major public universities. It supports calendars, word processing, and most other basic applications, including web site creation.

Google overall has been struggling. A few years ago, it made a strategic decision to move beyond being a search engine, and instead also invest in software, such as Google Apps, and hardware applications as well. It is those hardware products that have bedeviled the company. Its Chomebook laptops have not truly caught on in the marketplace. And its ballyhooed $12.5 million purchase of Motorola Mobility has not worked out so well thus far. The newly acquired unit posted an operating loss of $527 million in the third quarter of 2012, which was the first full quarter since the acquisition was completed. Perhaps worse is that much of the purchase price concerned Motorola's vast horde of patents. But as technology continues to advance at a breakneck pace, the value of all those patents falls every day. Added to the hardware problem, Google's core advertising operation also took a hit with lowered revenue per click.

In all, revenues in the third quarter came to $11.33 billion, net of revenue sharing, or commissions paid to partners. Due to the Motorola Mobility deal this represented a substantial increase from the third quarter of 2011, but still well under the $11.9 billion analysts had expected. Profits came to $2.18 billion, or $6.53 per share, about 20% below last year's third quarter.

What all this bad news has done, in my view, is make Google a more buyable company. Its PEG is down to 1.26, and its stock price is down some 15% from its recent highs. Google has plenty of smart people and plenty of cash (about $35 billion) on its balance sheet to make wiser use of its cash than it has in recent years, and I think of Google as a buy and hold candidate for most investors.

If any readers are interested in transferring parts or all of their storage or application needs to the cloud, they might want to consider a company focused on that technology rather than those described above, to which cloud applications are a small part of the overall enterprise. One such specialty company is Younicycle. This company offers services such as template design, site creation, and the suite of Google Applications. It also helps developers to collaborate online through its fully integrated and powerful Cloud services. Application developers can closely work with content developers in real time by sharing files online, co-managing databases, and securing data. Younicycle’s website is the online version of Younicycle and is presented as Software as a Service (SaaS). The company also offers a Younicycle Server Package (YSP) for your own server and a Younicycle Enterprise Package. 

Salesforce.com (NYSE: CRM) is a surprisingly large force in the cloud computing derby. The company describes itself as a provider of “cloud computing and social enterprise solutions to various businesses and industry worldwide.” Some see Salesforce.com as being on a similar path to behemoth Oracle (ORCL) in that it started as a focused company before launching into ancillary businesses, such as Salesforce.com's full suite of online and cloud applications.

Salesforce.com does not release its third quarter earnings until mid-November. In its most recent reported quarter, it missed by a fairly large margin Wall Street expectations due largely to selling expenses that raised nearly $400 million from the year ago quarter as the company fights for market share. Wall Street is assuming Salesforce.com's efforts for additional revenues will be successful, and has assigned a five year average growth rate of 28%. But as it is, the company is selling at such a rich price to earnings ratio that its PEG is still a whopping 3.5. I might be more interested in this company if its future were more defined, or it weren't valued so frothily. But as it is, me, or anyone else with a value orientation, should look elsewhere.

 


StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Google and has the following options: short JAN 2013 $150.00 calls on Salesforce.com and long JAN 2013 $150.00 puts on Salesforce.com. Motley Fool newsletter services recommend Salesforce.com, Google, and AT&T.; Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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