Near as I can tell, Adobe (NASDAQ: ADBE) was the first.
If you don't know, Adobe makes the Photoshop software. That's not all the company makes, of course, but Photoshop is a pretty familiar name. I ponied up for Photoshop a time or two at Office Depot for my daughter.
I remember thinking $80 for a disc seemed like a lot. Adobe must be doing pretty well...
Not good enough, apparently, because in 2012, CEO Shantanu Narayen blew it all up.
Instead of selling discs with software on them, Adobe would put all its software online and charge subscription fees.
Now, it takes guts to toss a business model that's been generating $3–$4 billion a year in revenue into the trash can. But Adobe is expected to do $8.8 billion in revenue this fiscal year and $10.4 billion next year. Net profit margins have ramped up ~50%. So, good call on moving it all to the cloud, Mr. Narayen...
A year later, Steve Ballmer retired from Microsoft and the new CEO followed the Adobe roadmap and went "all in" on the cloud, too. The stock has tripled. (My Options Trading Coach subscribers just took a 116% gain on some Microsoft calls in eight days.)
The Cloud Makes it Rain
I feel a little silly every time I say "the cloud." I mean, what was wrong with the old name? You know, the internet? We all know what "internet" means. But cloud? What the hell is that?
The cloud is just the internet... only less cool and kind of confusing. So when Apple makes it sound like you are really special because you can store your pictures on the iCloud, well, you're not special. And neither is the iCloud. Your pics are on the internet, big whoop.
In business terms, it actually is a big whoop. Software companies lower their costs, charge less, and improve revenue and profit margins. Costs are fixed, and piracy (which some say was as high as 30%) is ended. It's called Software as a Service (SaaS).
You wanna know why Netflix can trade with a forward P/E of 78 and at nearly 13 times revenue? It's the internet, baby! I mean, it's the cloud, baby! (See? Confusing, and less cool.)
But really, Netflix has fixed costs. $7–$8 billion for content. If it only has 117 subscribers, it won't do too well. But at 117 million, Netflix can post about $1.1 billion in earnings. And if it gets to 1.17 billion subscribers, it's earning $10 billion and probably paying a dividend.
Yeah, OK, you say. That's great for Netflix and Microsoft. But so what?
Well, let me ask you this: How many servers has Facebook bought in the last five years?
3.2 trillion! Just kidding. I don't know actually know how many servers Facebook has bought. I do know Facebook plans to start designing its own chips. So, my point is that this boom in intern... I mean, cloud services isn't an isolated thing. Data centers are expanding. Servers are selling like hotcakes. Chips sales are booming as online activity increases...
I recommended a data center stock to my Wealth Advisory subscribers back in January of 2016. It was one of my first "cloud" stocks, though I didn't know it at the time. My research was simply showing the massive amount of data flowing over the internet and how much it was expected to increase over the next few years, and I put two and two together...
And it came up a 256% gain.
More recently, Wealth Advisory readers were buying a company whose mobile messaging app connects Uber drivers to their customers. Airbnb, eBay, Netflix, Sprint, and Lyft are also customers. That one's been good for 82%...
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Dow 30K? Sure, Why Not?
The S&P 500 has surged through recent resistance at ~2,741. And it has rallied in the face of concern about interest rates, trade, and earnings growth, with a smattering of geopolitical stuff thrown in for good measure. This is the very epitome of climbing the Wall of Worry, a true test of a bull market.
We should be prepared for more gains...
In fact, I've been hearing people whose opinions I respect say this is 1998 again. In 1998, the markets had already gone through both Greenspan's "irrational exuberance" speech and the Asian currency crisis. I was just starting in this biz, and everything wasn't sunshine and rainbows for the global economy. But then came the internet. Local business could go global with the click of a mouse. There was a surge in productivity and, most importantly, an incredible surge in investor/consumer sentiment.
The result was an amazing opportunity to make crazy amounts of loot.
Of course, it didn't end well. It never does. Booms lead to busts. This is how the human psyche works. But that doesn't mean we just ignore the boom time.
I don't know if we're about to enter a boom time. Seems to me things have been going pretty well for a decade. But there's still plenty of pessimism about stock valuations, the economy, and the political scene, so...
If we do get a surge, it's gonna be the "cloud stocks" that drive the virtuous cycle. So be prepared.
Until next time,
A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.
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