This Tech Stock Will Send Your Portfolio into the Clouds

Have you heard of cloud computing? If you haven’t or you are not sure how to invest it, take a few minutes and read on because these clouds come in the shape of dollar signs when you invest in EMC!

Here’s how cloud computing works:  Instead of buying software and installing it on your computer, (that’s so 10 years ago) you use the software on the web. If you have a gmail or Hotmail e-mail account, you are already operating in the clouds. CEOs have financial tears of joy over this.

Why? Troubleshooting software problems in house are virtually eliminated, (get it? “Virtually?” You might be a techno-nerd if you got it) no more big dollars spent on software updates and what is even better, employees can work from anywhere. More productivity for less money is a CEO’s dream.

Who is the keeper of some of these great clouds? EMC. They have the servers, the software, and all of the related techy stuff that a company needs to operate in the cloud.

The Numbers

Market Capitalization                     $40.7 Billion

Earnings Per Share(TTM)              $.70

Revenue(MRQ)                                                $4 Billion

Net Income(MRQ)                          $426.2 Million

(Source: Scottrade Quotes and Research)

TTM- Trailing Twelve Months. MRQ- Most Recent Quarter

Sky-High Figures

EMC’s most recent earnings report revealed that storage revenue is up 21%, security services are up 18%, and VMWare, the flagship of their cloud division, is up 48%. Free cash flow is up 47% which translates to $10 billion in cash and short-term securities. Are you thinking that these guys are rich? You’re right, and as any good management team would do, they have a plan for their cash: Buy back $1 billion in stock and further invest in R&D.

Companies with a big R&D budget thrive in the tech space. (Just think of Apple) And those who don’t end up as yesterday’s tech news? Just look at what Netflix did to Blockbuster or Facebook to MySpace. With corporate IT spending expected to rise 3% to 5% in 2010, EMC is in a great place to capitalize on the growing IT trend by putting its massive cash reserves to work building market share.

What would you pay for EMC? With a solid quarter of 20% revenue growth and EMC’s guidance of $1.18 per share, this stock is a bargain at 14 times forward earnings. It’s even more of a bargain if you believe many of the analysts who think EMC is going to blow clean through that $1.18 number.

Headwinds

A recent study by Proofpoint revealed that corporate IT departments aren’t fans of cloud computing. Only 37% believe that the cloud will produce a positive return on investment in its first year of implementation. The cloud has the potential to eliminate a lot of IT jobs so it’s not surprising that IT pros are slow to accept it.

The Forecast

EMC is a buy! Given its 10% recent run up, I would wait for a pullback if you’re looking to trade it but as a medium or long term investment, buy it today. Don’t look at cloud computing as the next tech fad. Anything that saves a company major money is definitely a cloud with a silver lining and EMC is that cloud.

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