Tech Ideas: Buffett Shows How to Buy Into Cloud Computing, Cheaply

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(Written by Rebecca Lipman)

Do you think Warren Buffett is a financial genius? You wouldn’t be alone, and if you’re thinking of investing in cloud computing, you may want to take tips from his playbook.

It’s worth noting that Warren Buffett had always turned a blind eye to tech stocks because he didn’t understand them. Instead of buying into sexy, overly complicated businesses, he’s always preferred boring stocks along the lines of railroads, soft drinks, and insurance industries.

So it came as a shock when he seemingly forgot his trepidation and drove head first into International Business Machines (IBM) with a $11 billion investment.

Buffett’s Lesson

IBM is a member of the ISE Cloud Computing Index. Launched in July, the index consists of companies “supporting or utilizing” cloud computing, according to its creator, the International Securities Exchange.

The ISE index is up 277% over the past three years, versus 11% for the Standard & Poor’s 500-stock index. (viaSmartMoney)

Despite these stellar returns, the industry is “shark-infested waters” for some of the high-price cloud stocks. In such a competitive market, if a stock should fall, it will likely be a quick decline with little chance of a rebound.

Still, if you’re interested in jumping on board the Cloud Computing trend there are a few options.

Investing In The Cloud

IBM, despite its exposure to hardware sales, also has a strong exposure to cloud computing thanks to its recurring service revenues, according to Robert Cihra, an analyst with Evercore Partners. “IBM also has “unique technologies for setting up cloud-based networks than can’t be matched with commodity, off-the-shelf products,” says Cihra.

David Rolfe, chief investment officer at Wedgewood Partners adds EMC (EMC) to the mix. “For cloud computing you need massive amounts of storage,” he says. “EMC is the key arms merchant for companies that need more storage.”

Microsoft (MSFT), whose programs run on millions of personal computers, would be at a disadvantage not to jump on board. It has launched its own brand of cloud computing platforms called Azure. “The market under-appreciates how big a move they’ve made into the cloud,” says Mark Moerdler, an analyst with Bernstein Research.

Joseph Doyle, a money manager with Morris Capital Advisors likes software giant Oracle (ORCL), is a big player in the collaboration relationship management market and recently announced it will buy Rightnow Technologies (RNOW), a Salesforce.com (CRM) rival. “If there’s a way to make money on the cloud, count on [Oracle Chief Executive] Larry Ellison to do it.”

Other pure-play contenders include Rackspace Hosting (RAX) and VMware (VMW). Hard-disk and computer chip makers like Western Digital Group (WDC), Seagate Technology (STX) and Intel (INTC) can also stand to gain from server storage.

The ETF route: “Investors can buy into the index via an exchange-traded fund offered by First Trust or an exchange-traded note from UBS (UBS) that seeks to (gulp) double the index’s monthly return using leverage,” writes Jack Hough of SmartMoney.

The List

Interested? Here’s a closer look at the cloud-related equity options mentioned above.

Analyze These Ideas (Tools Will Open In A New Window)

1. Access a thorough description of all companies mentioned
2. Compare analyst ratings for all stocks mentioned below
3. Visualize annual returns for all stocks mentioned

List sorted alphabetically.

1. Salesforce.com (CRM): Market cap of $15.15B. Provides customer and collaboration relationship management (CRM) services to various businesses and industries worldwide. Share price as of 11/21 at $111.98. The stock is currently stuck in a downtrend, trading -14.23% below its SMA20, -12.% below its SMA50, and -16.55% below its SMA200. It's been a rough couple of days for the stock, losing 16.13% over the last week.

2. EMC Corporation (EMC): Market cap of $46.39B. Develops, delivers, and supports the information and virtual infrastructure technologies and solutions. Share price as of 11/21 at $22.74. It's been a rough couple of days for the stock, losing 7.03% over the last week.

3. International Business Machines Corp. (IBM): Market cap of $213.90B. Provides information technology (IT) products and services worldwide. Share price as of 11/21 at $181.48. Relatively low correlation to the market (beta = 0.67), which may be appealing to risk averse investors. The stock has gained 26.94% over the last year.

4. Intel Corporation (INTC): Market cap of $120.02B. Engages in the design, manufacture, and sale of integrated circuits for computing and communications industries worldwide. Share price as of 11/21 at $23.57. Offers a good dividend, and appears to have good liquidity to back it up--dividend yield at 3.56%, current ratio at 2.24, and quick ratio at 1.91. The stock has gained 14.86% over the last year.

5. Microsoft Corporation (MSFT): Market cap of $210.30B. Develops, licenses, and supports a range of software products and services for various computing devices worldwide. Share price as of 11/21 at $25. Might be undervalued at current levels, with a PEG ratio at 0.78, and P/FCF ratio at 10.7. Offers a good dividend, and appears to have good liquidity to back it up--dividend yield at 3.2%, current ratio at 2.95, and quick ratio at 2.86. It's been a rough couple of days for the stock, losing 5.87% over the last week.

6. Oracle Corporation (ORCL): Market cap of $150.88B. Develops, manufactures, markets, distributes, and services database and middleware software, applications software, and hardware systems worldwide. Share price as of 11/21 at $29.91. It's been a rough couple of days for the stock, losing 7.4% over the last week.

7. Rightnow Technologies Inc. (RNOW): Market cap of $1.42B. Provides cloud-based customer experience software products and services. Share price as of 11/21 at $42.85. The stock has had a good month, gaining 19.16%.

8. Seagate Technology PLC (STX): Market cap of $6.78B. Designs, manufactures, markets, and sells hard disk drives for the enterprise, client compute, and client non-compute market applications in the United States and internationally. Share price as of 11/21 at $16.15. This is a risky stock that is significantly more volatile than the overall market (beta = 2.17). Offers a good dividend, and appears to have good liquidity to back it up--dividend yield at 4.46%, current ratio at 1.97, and quick ratio at 1.7. It's been a rough couple of days for the stock, losing 9.07% over the last week.

9. VMware, Inc. (VMW): Market cap of $40.01B. Provides virtualization and virtualization-based cloud infrastructure solutions primarily in the United States. Share price as of 11/21 at $94.76. It's been a rough couple of days for the stock, losing 7.63% over the last week.

10. Western Digital Corp. (WDC): Market cap of $6.10B. Engages in the design, development, manufacture, and sale of hard drives worldwide.26.11. The stock has lost 22.55% over the last year. 



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , Technology


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