Profit-While-You-Learn Lesson No. 1:
Big Trends Equal Big Profits
Back on May 9, 2012, Internet bellwether Cisco Systems Inc. (Nasdaq: CSCO) warned investors of a weaker-than-expected outlook for the current quarter – thanks to what CEO John Chambers described as a "cautious" spending environment for networking gear.
Cisco's shares were trashed – as were many other tech-sector stocks.
So I was more than a little surprised when Cisco announced just a couple of weeks later that a new company study says Web traffic will quadruple in the next four years.
That's one heck of an about-face.
But it's also one heck of a profit opportunity.
In fact, it steers us directly to Profit-While-You-Learn Lesson No. 1: When you uncover a big trend, take some time to look around – there's a big profit opportunity lurking nearby.
In this case, the big trend is the predicted escalation in Web traffic. As is true of any other trend, someone is going to benefit. If you can figure out who that beneficiary will be – and calculate how they will benefit – you can reap the payoff.
To sort this out – and get the real story for you – I went directly to our resident tech-sector expert: Radical Technology Profits Editor Michael A. Robinson.
Michael believes that Cisco's traffic estimate is accurate in terms of its magnitude. And even if the timing is off by a year or two, it still highlights one of the biggest and most-predictable tech profit opportunities of the decade.
"You know Bill, there's an old investing adage that says to never have a date and a number in the same statement," Michael quipped. "Like so many futurists, Cisco is guilty of making an all-too-definitive statement. I have no doubt that the company is correct in the broadest sense in terms of the traffic increase it sees. We'll see about the timing."
I have to tell you here: I like Michael a lot. And I think that you will, too.
Like me, Michael's an author and former journalist. And he's one of the sharpest tech analysts I've ever met. As kind of a cross between tech prognosticator Ray Kurzweil and pioneering Internet analyst Mary Meeker, he's one of those rare folks who has the broad knowledge and vision of a futurist, but who can also cut to the chase by identifying money-making investment opportunities.
And this ramp-up in Internet traffic is just one of the lucrative possibilities he's already looking into.
"I use the term 'Internet' much more loosely than most analysts," Michael said. "I look at it as 'networked knowledge.' That opens it up to such things as intranets, cloud computing, machine-to-machine communications, and the 'Internet of Things,' to name just a few. General Electric (NYSE: GE) recently announced it was investing $1 billion to develop the Industrial Internet. My view of the Internet also includes some way-out stuff that looks well into the future."
By defining the Internet as more than just the World Wide Web, Michael is able to pull from a plethora of investment plays, including:
- Passive surveillance.
- The "pick-and-shovels" Internet backbone.
- Sensor-driven real-time communications.
- Wearable computers.
- Entertainment and gaming.
- Mobile communications.
- E-commerce (including mobile commerce).
- And social networking.
The details Michael provided for these categories (mass-produced robotic insects as a subset of robotics, for instance) are fascinating and remarkable.
Right now, though, the fact that we're going to see all this extra traffic on the Internet brings me to a key question – two, actually:
- Where are we going to store all of the extra "stuff" that's going to be posted, and be the catalyst for driving all this extra traffic?
- And how will we protect – provide security for – of this new content?
For instance, the industry is moving to HTML5, a major rewrite of the actual software for the Web. It will be easier for browsers to use. And it will offer splashier graphics. That will help drive traffic and increase the need for storage.
So how do you play this?
With a market leader in a high-tech business that will continue to see demand growth for years to come.
… with a company that's gaining market share from its closest rivals.
… and with one whose shares are undervalued.
That's what I call a recipe for success – playing a big trend for big profits.
The company that I'm talking about is EMC Corp. (NYSE: EMC), a market leader in data storage and data security – two of the hottest growth areas in technology.
After hitting a 52-week high of $30 a share in late March, the stock dropped back to $22.85 in early June. The shares have surged a bit since then.
But the really big gains are still to come.
The Hopkinton, Mass.-based EMC is the No. 1 player in the market for external-data-storage systems, controlling about 29% of a $6.6 billion business. Its chief rival is NetApp Inc. (Nasdaq: NTAP), which had a 14.1% market share, according to tech researcher International Data Corp.
Indeed, IDC has been losing market share for three straight quarters, while EMC has seen its market-share numbers increase.
And that's not all: Through a continuing campaign of well-chosen acquisitions, EMC has added hardware and software offerings to its product line.
This perpetual upgrading made EMC more of a one-stop shop in the data-storage market. At the same time, it's also helped the company maintain a healthy profit margin despite increasing price competition in the hardware slice of the business.
EMC's tactical shrewdness will continue to pay off, too. Thanks to growing use of video – not to mention digital record-keeping – on the Web, data-storage spending really has nowhere to go but up.
In fact, computer hardware and data storage will account for a big portion of the information-technology (IT) purchases that we'll see over the next few years, technology researcher Gartner Inc. predicts.
No wonder Gartner also sees IT spending jumping from about $106 billion this year to $127 billion by 2015.
Nor is EMC content to stand pat with a big market share in its current businesses. The company's acquisitions have increasingly focused on "cloud computing," roundly hailed as the next big thing in the great data domain.
And I do mean big.
Forrester Research Inc. predicts the global market for cloud computing will zoom from about $40 billion right now to $241 billion by 2020. And many of the corporations and government agencies that will be doing this spending are the same ones that EMC already sells its data-storage products to – a fact that should smooth its shift into this new business segment.
The company's finances are rock solid, too – a crucial consideration in the face of a global financial crisis being fueled by debt worries and uncertainty.
In late June, in fact, the debt-rating unit of Standard & Poor's Inc. boosted EMC's credit rating from "A-minus" to "A," citing the company's expanding market position, solid operating performance and highly liquid balance sheet as the basis for the upgrade.
EMC also has an intriguing ace in the hole – a 79% majority ownership in VMware Inc. (Nasdaq: VMW). VMware makes software that helps companies cut data center costs. That company, which saw its revenue (top line) grow 32% in 2011, accounted for 19% of EMC's revenue.
The "unrealized value" in VMware gives EMC a heck of a lot of asset protection, S&P said in its report. Add to that EMC's small debt load and free cash flow in excess of $4.5 billion, and you're looking at a company with a Gibraltar-like financial foundation.
(In fact, at the time we put this report together, speculation was spiraling that the "cloud-computing" assets of VMware could be spun-off into a new company, unlocking additional value for shareholders. Spin-off investing – Profit-While-You-Learn Lesson No. 15 – is one strategy we revisit frequently in Private Briefing.)
That brings us to the profit opportunity we see in EMC's stock.
All of the factors we've discussed here – the high market share, the long-term vision and the exposure to top-tech-sector trends – combine to create a big potential upside for EMC shares.
How big? Well, institutional investors currently have a one-year target price of $33.05 on the stock. And S&P's equity-research arm, which tends to be a bit more conservative than "The Street," actually has a 12-month target of $36 – which would represent a 35% return from where the stock was trading when we wrote this.
In a market as volatile as this one – especially given the uncertain global backdrop – that's an excellent near-term return.
But I think those projections are too low.
See, they don't factor in three intangibles. Benefits or assets that are unrealized in the valuation, but tell us that EMC shares are destined to eclipse any of these conservative Wall Street targets.
The first intangible we've already mentioned – the potential for EMC to more-directly monetize the value of its VMware holdings – isn't being quantified here. Cloud computing is a vast growth opportunity, and the leaders can expect to experience hefty-double-digit growth rates for a number of years to come. The EMC/VMware cloud-computing venture will be able to grow much faster when broken free of the parents, because the legacy parts of the company (storage and virtualization) compete with businesses operated by some of the cloud-computing unit's potential customers.
And if that company is broken free, you'll either get a piece of the new venture, or be otherwise compensated.
The second intangible is the recent revelation that EMC just spent $19.994 million to purchase a total of 241,818 VMware shares. Since June 28, EMC has purchased roughly 361,000 VMware shares – with no sales.
That tells us that something is brewing. And you want to be invested before it bubbles over.
The third, and final, intangible is our internal expectation that tech stocks are in for a big run – and soon.
After a sloppy spring that saw a lot of tech leaders experience steep share-price declines, resident tech guru Michael Robinson sees a powerful run building.
"The way things are shaping up, I think we could be in for a strong run in the fall," Michael said. "Tech stocks in particular could start to turn in mid-September or as late as mid-October and then head higher for a number of months. The whole 'tech ecosystem' should start to do really well. After Labor Day you have back-to-school sales, and then the seasonal sales and holiday sales you see starting in the fall. Sales of tablets and phones will pick up. And that will be good for chips, software, accessories."
When you add all of these things together, we think there's only one conclusion to reach: EMC represents a big potential payday – from a big trend – for you.
Action to Take: Buy EMC Corp. (NYSE: EMC) at the market. Use a 25% "trailing stop" to protect your principal investment and your profits.