By J. Royden Ward
Today, I bring you two companies that are leading the way in cloud computing innovations: Google (GOOG) and Research in Motion (RIMM).
Google is one of the most recognized companies in the world. The company’s mission is simple and successful: “To organize the world’s information and make it universally accessible and useful.” Google generates revenue by providing companies with opportunities for targeted advertising.
Thousands of companies use Google’s AdWords and AdSense programs to promote their products and services on the Web with advertising relevant to the information displayed on search pages.
Google management has aggressively stayed ahead of its competition by expanding and improving GOOG’s search engine and advertising. Founded just 10 years ago, the company’s 2009 sales exceeded $23 billion with profits of more than $6 billion. The balance sheet is very strong with no debt and $24 billion in cash. The company pays no dividend.
Google appears to be the leading developer of cloud computing. Google employees can now store most of their business and personal software and data, such as pictures, videos, presentations and emails, on the Web. This makes software and data equally accessible from home computers, public Internet cafés or smart phones. Google’s cloud computing also makes damage to a hard drive less important.
According to a Wall Street Journal article, Google is expected to launch a service in 2010 that will let users store the contents of entire hard drives online. The company has not confirmed this plan, but Google already enables users to port personal and business data to the Internet and use the company’s Web-based software. Google’s Calendar organizes events, Picasa stores pictures, YouTube (now owned by GOOG) holds videos, Gmail stores emails, and Google Docs stores documents, spreadsheets and presentations.
Sales increased 9% during the 12 months ended 12/31/09 while earnings per share jumped 19%. We expect sales growth of 14% and EPS growth of 20% in 2010 and in future years. Google will continue to benefit from increasing Internet usage and the effectiveness of online advertising.
Google may cease operations in China because of cyber attacks on Google users and China’s censorship of free speech. I believe the Chinese government will not back down, and Google will cease operations in China. The company, though, derives less than 1% of its revenues from China!
The recent decline in Google shares has created an outstanding buying opportunity for investors. GOOG shares now sell at 24.8 times my 2010 earnings per share forecast of 23.50, which is low in comparison to the 20% EPS growth that we foresee during the next three to five years.
Now on to Research in Motion (RIMM), a Canadian company and a leading manufacturer of wireless cell phones designed to handle voice and email communications. The company’s BlackBerry smart phone has been the clear leader in the business (commercial) market since its introduction in 1999. Research in Motion has recently launched an effort to sell BlackBerries to casual (consumer) users, which has met great success. Sales to business users have been robust, as evidenced by solid sales and earnings growth during the recent recession.
One of Research in Motion’s independent software vendors, Mezeo Software, now offers cloud storage to BlackBerry owners, which allows users to upload, access, view, and share files online from their BlackBerry smart phones.
Research in Motion commands 55% of the U.S. smart phone market, and the company maintains a strong balance sheet with $4.40 per share of cash. The company is in the enviable position of having plenty of cash to invest in new products to stay ahead of the competition.
New smart phone models, such as the Bold, the Curve and the Storm are selling very well. Aggressive expansion overseas, except China, is providing surprisingly strong growth, too. I expect consumers to opt for less expensive models, which will hamper total sales dollars, but aggressive promotions and new products will help Research in Motion gain additional market share.
Sales soared 51% and earnings per share jumped 23% during the 12 months ended 11/30/09. I expect sales and earnings growth to exceed 20% during the next 12 months, with EPS growth of 20% per year during the next five years. RIMM shares sell at a very modest 13.3 times my next 12-month EPS estimate of 4.79. RIMM pays no dividend. The stock is clearly undervalued and presents an outstanding investment opportunity.
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