Cloud Computing Stocks to Buy

There are no prizes for guessing that cloud computing is the IT sector's hot buzzword is right now. Blue chip tech companies like Google, IBM, Oracle  and Microsoft are all investing in offering infrastructure as a service, or IaaS, solutions to their customers. In addition, there is an ongoing trend of incumbent software companies shifting toward software as a service, or SaaS, based models. For example, Intuit, Adobe, and Autodesk are all making the change, but what is in it for them? Moreover, what are the tangible benefits of cloud computing for these companies?

READ THE FULL ARTICLE LINKED HERE

Two Thematic Tech Trends

Asking a group of IT investors to outline which technology is going to be the next big thing is unlikely to reach any kind of consensus. However, most investors are likely to agree to on two things: technology cycles are getting shorter, and IT is becoming ever more specialized. If you agree with these statement, it's time to examine which sectors and stocks are likely to benefit from these shifts. 

Adam Smith Revisited
The great Scottish moral philosophers David Hume and Adam Smith pointed out that increasing division of labor would lead to greater productivity. The difference between their time and now is that workers' skills are becoming increasingly more refined. In addition, the intellectual quotient of a good's value (think of smartphones versus last decade's phones) is increasing. Moreover, according to an article in the Harvard Business Review: "Today, thanks to the rise of knowledge work and communications technology, this subdivision of labor has advanced to a point where the next difference in degree will constitute a difference in kind. We are entering an era of hyperspecialization."

Three investment themes benefit from hyperspecialization and shorter tech cycles.

Technology staffing companies
First, companies will be more inclined to hire temporary workers with highly defined skills, rather than spend large amounts to train in-house employees, or hire a project consulting firm. Indeed, that is exactly what technology-focused staffing firms like, Kforce or On Assignment  are seeing. Quoting from its recent conference call, where On Assignment's CEO, Peter Dameris, said: "We're not saying that we're beating Accenture at project consulting. We're saying that the customer is deciding more often than not now that maybe they should do this on an IT staff aug basis, versus a project consulting basis."

Furthermore, when questioned on the opportunity for bill rates to increase (something likely to significantly improve On Assignment's profitability), Dameris replied that the skill sets it provides are becoming "more and more scarce." The facts back him up. For example, according to government figures, despite the number of college degrees issued in the U.S. increasing by 51% from 1992-2011, the increase in engineering degrees issued only went up 20%.   That's a growth rate of less than 1% per annum, significantly below long-term GDP growth.

Information services
Shorter tech cycles also imply that companies need to remain current on business trends, and this is where the information services companies come into play. They allow companies to "outsource knowledge." With regard to IT trends, the best known name is Gartner  . Indeed, Gartner has grown revenue by 6.8% and earnings per share by 14% per annum since 2008. This is an extremely impressive performance, given that 2009 was a recessionary year and Gartner operates in the highly cyclical IT sector. In addition, according to its management, the company has genuine pricing power and has "consistently increased our prices by 3%-6% per year on an annual basis since 2005."

Another company worth examining is Nielsen, a leader in provider insights into consumer behavior. Technology is significantly changing retail and media channels, and this is putting pressure on Nielsen's customers to monitor and analyze information across many different platforms. Think about social media, mobile, Internet TV, and video-on-demand. Plus, advances in communication are creating global opportunities for marketers, yet media continues to fragment. All of these factors are likely to provide good growth opportunities for Nielsen.

Moving to the cloud
The third key beneficiaries are likely to be cloud-based solution providers. If technology cycles are getting shorter and more specialized, it's likely that companies will want to buy solutions on a subscription basis. After all, why buy an expensive software solution if it's going to be outdated in a few years?

Adobe, Autodesk  and Intuit are three leading names in this regard. Intuit is arguably the early mover with its TurboTax software, while Adobe has been transitioning is digital media and marketing software toward the cloud in 2013. However, AutoCad company Autodesk is probably the most interesting stock right now. Autodesk is shifting software sales from stand-alone products to software-as-a-service-based suites of bundled software. It appears to be working, as Autodesk reported 21% growth in sales in the third quarter. Autodesk believes in can generate 20% more value with its subscription customers.

The bottom lineIT trends are changing at an ever-faster pace, and the companies above have opportunities to profit. Frankly, they are all cyclical companies, but if you are a Foolish investor looking for a cyclical stock that can outgrow its markets, then these stocks are well worth a look.

Time to Buy Autodesk?

There have been two major themes to the first quarter reporting season. The first is that tech spending has been weak across the board, and the second is that--outside of pockets like aerospace and automotive--the industrial sector has been weak too. Cue Autodesk’s latest set of results. It’s a software company and its end markets are industrial. The rest is history--the company's results were disappointing and it guided lower. What's next for Autodesk, and what do its latest results say about the industrial sector?

Autodesk’s first quarter results

I have previously covered the stock, and those wanting to assess the migration of its earnings can get some background information on the company there.

 A brief look at Autodesk's first quarter numbers versus its internal guidance:

• first quarter revenue of $570 million vs. internal guidance of $570-590 million

•  first quarter earnings-per-share of $0.42 vs. internal guidance of $0.41 to $0.46

• second quarter revenue guidance of $550 to $570 million vs. analyst estimates of $583 million

• second quarter EPS guidance of $0.39 to $0.44 vs. analyst estimates of $0.45

• Full-year revenue guidance of $2.38 billion vs. analyst estimates of $2.45 billion

The end result is that the company's revenues and earnings for the first quarter came in at the bottom end of guidance, and its future projections were lower than analyst estimates. I appreciate that the lowered guidance may appear to be somewhat easier for the company to hit, but I want to demonstrate how even this might prove tough.

Assuming that the mid-point of the second quarter guidance is hit, the remaining $1.25 billion in revenues that were forecast by Autodesk could be split up in the following manner. I note that the management stated that fourth quarter growth would be stronger than that of the third quarter, so some back-of-the-envelope revenue estimates of $593 million and $658 million for the third and fourth quarters respectively could be implied. I want to graphically demonstrate what this means to the back end of 2014’s revenues.

Looking at it, reaching these goals seems like a fairly big ask. The company was duly forced to spend significant time during its conference call discussing various reasons why targets like these might be feasible.

Can Autodesk hit guidance?

The main reasons that Autodesk gave to indicate that it can hit its (lowered) full year guidance are:

• Its business is becoming more back-end loaded with its major account business. As this was an area of weakness in the first quarter, the numbers are expected to contribute more in the second half.

• Autodesk argued that $24 million of growth for the first half of 2014 was pulled into the fourth quarter 2013, resulting in somewhat distorted seasonality for 2014.

• The comparisons from the second to fourth quarters of last year are a lot easier to beat.

• The ongoing transition in its business model towards selling software as a service (SaaS) suites (bundled software packages) rather than standalone flagship products should drive growth in the second half. This is similar to he way that Adobe Systems  is shifting its customers to SaaS-based solutions instead of standalone software.

• Autodesk sees improved strength in certain sectors of the economy that heavily use its software, such as global commercial construction. The company is also making progress in expanding its automotive accounts.

There are notes of caution against this, of course:

• The company reported that April is weak. With other manufacturing exposed companies like Fastenal and MSC Industrial Direct reporting weak numbers before April, this is not a good sign for the second quarter.

• Despite the second quarter of last year being relatively weak, the guidance for the second quarter of 2014 is not great.

• Emerging markets underperformed in the quarter. These markets are supposed to be a long-term growth driver for the company.

• Suite sales in emerging markets have been a bit disappointing, and piracy remains an issue.

• The transition to SaaS is making the company's revenues harder to predict, and with companies like Adobe shifting sales models towards SaaS and subscription-based sales it is causing some hesitation in the purchasing habits of customers.

Essentially, the manufacturing sector has been weak as both Fastenal and MSC Industrial confirmed in their earnings reports that are discussed here. Both companies have limited visibility and short sales cycles. MSC saw sequential weakness in the quarter to the end of March, and with Autodesk saying that its April got weaker then this is hardly good news for MSC.

It was a similar story with Fastenal, though interestingly it saw stronger results in its metal work operations. I think this is partly due to having more exposure to aerospace and automotive. Investors in the industrial manufacturing sector should watch the statements of these two companies quite closely while also keeping an eye on the ISM numbers.

As for Adobe, its shift looms large in Autodesk’s thinking because the former has started to regenerate growth in its core product range thanks to the shift to SaaS and subscription-based sales. At some point Autodesk may well emulate Adobe’s model of ending perpetual license sales (which will cause some short-term revenue shortfalls as customers shift), but until then we shouldn’t model too much of these effects onto Autodesk’s numbers. Prospects for Adobe look good in the mid-term but will it hit is (raised) expectations this year, bearing in mind how many other tech companies have warned in the first quarter?

Where next for Autodesk?

In conclusion, I think that it makes sense to wait for more evidence of a pick-up in general industrial conditions before buying into Autodesk. I've no doubt that many will be tempted into buying in after the fall as this has been a good tactic this quarter, but cautious investors may want to wait to avoid buying in while the stock still has room to fall.