By JACK HOUGH
For a way to invest in "cloud computing" without paying a stratospheric price, take a cue from Wall Street's newest tech enthusiast: Warren Buffett.
Mr. Buffett, who has long avoided computing stocks while favoring railroads, soft drinks and insurance, announced this week that his Berkshire Hathaway (BRKB)
Last year, the century-old tech giant announced a goal to boost yearly cloud-computing revenues by $3 billion by 2015, to $7 billion. That is a sliver relative to its current total revenues of $106 billion, but it is an important source of growth.
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. Alongside the likes of IBM are younger pure-play companies such as Salesforce.com (CRM),
Cloud computing is a catch-all term for the shift of programs and data storage away from user machines and onto the Internet. Investors are enamored of the trend; the ISE index is up 277% over the past three years, versus 11% for the Standard & Poor's 500-stock index.
Investors can buy into the index via an exchange-traded fund offered by First Trust or an exchange-traded note from UBS (UBS)
But cloud investing carries big risk. The median of 40 ISE index members sells for 25 times projected earnings for its current fiscal year, nearly double the S&P 500 index median.
"It's shark-infested waters with some of the younger, high-price cloud stocks," says David Rolfe, chief investment officer at Wedgewood Partners, a St. Louis asset manager. "If these companies stumble, the market reaction will be swift."
Consider Salesforce.com, a provider of web-based customer relationship management, or CRM, software, which allows companies to track customer inquiries and sales pitches. Its sales have surged in recent years and its shares until recently fetched more than 100 times earnings. But on Thursday the company projected a fourth-quarter profit that left investors wanting more. Shares fell 9% on Friday.
Well-diversified, less-expensive companies like Mr. Buffett's new prize offer a safer way to invest in cloud computing, says Robert Cihra, an analyst with Evercore Partners (EVR),
IBM also has "unique technologies for setting up cloud-based networks than can't be matched with commodity, off-the-shelf products," Mr. Cihra says.
Mr. Rolfe sees EMC (EMC),
It also owns a majority position in VMware, which makes so-called virtualization software that helps companies get more use from the servers they own. But whereas VM Ware trades at 45 times earnings, EMC is at 15.
Joseph Doyle, a money manager with Morris Capital Advisors in Malvern, Pa., likes software giant Oracle (ORCL),
"The market under-appreciates how big a move they've made into the cloud," says Mark Moerdler, an analyst with Bernstein Research. Office 365 should keep large customers happy while convincing small ones using old or pirated Office versions to pay small monthly fees for access, he says.
Microsoft has a price/earnings ratio in single digits and offers something rare in the cloud: a juicy dividend yield of 3%, compared with a median of 2.3% for dividend-paying members of the S&P 500.
For some seasoned tech companies, the effect of cloud computing on profits isn't yet clear, Mr. Cihra says. Hard-disk makers like Western Digital Group (WDC)
Mr. Doyle says companies that can adapt will not only survive the cloud shift but thrive. "When I started in this business in the mid-1980s, I was told IBM wouldn't make it until the end of the century," he says. "That's all changed because of the Internet."—Jack Hough is a columnist at SmartMoney.com. Email: email@example.com