Nadella's Niche: 3 Cloud Choices

Satya Nadella’s appointment as the new CEO of Microsoft Corporation (MSFT) brings to a close a process that began last August. Since then, the software giant has considered nearly a hundred names for this position. Several notable outsiders were considered, including Alan Mulally of Ford Motor Co. (F) and President of Oracle Corp. (ORCL), Mark Hurd.

The Search for a CEO

Nadella’s elevation to CEO may have come as a surprise to some outsiders. He is relatively low profile, though a company veteran, having worked with both of the company’s former CEOs, Bill Gates and Steve Ballmer.

His contributions to the company are significant. Nadella has led key initiatives at Microsoft over the years. He is largely responsible for the success of Bing, the company’s search engine, forming crucial partnerships with the brands and advertisers.

Nadella’s Forte

However, it is in the cloud domain where he has made his most significant contributions. It is Nadella who has helped shift the focus from client services to cloud infrastructure and services. The Azure cloud and Windows server and developer tools have made great gains under his watch.

As executive vice-president of the cloud and enterprise group, Nadella was leading what is expected to be a major growth segment in the future. This includes the initiative to get Office onto the cloud via Microsoft Office 365. After he began heading the division in 2011, revenue from cloud services grew from to $16.6 billion to $20.3 billion in June 2013.

Focus Areas

Nadella has ignored suggestions urging him to focus exclusively on corporate and government customers and divest MSFT’s consumer businesses. He will continue with Steve Ballmer’s efforts to increase the company’s presence in the cloud and mobile computing arena.

At the same time, he is moving away from hardware to a software centric approach. Nadella emphasised the need to concentrate efforts on building cloud computing and related applications.

Cloud’s Ahead

The elevation of Nadella and his successes with Microsoft’s cloud division illustrate how crucial the segment will be going forward. Bessemer Venture Partners (:BVP) launched a Cloud Index in July last year which captures the fortunes of the top 30 cloud computing companies. These companies were collectively valued at $100 billion at the time. This was a clear indication, BVP said, that leveraging the cloud to power software and data storage was a theme that would come to dominate the tech domain.

Below we present three companies operating in the cloud computing domain, each of which also have a good Zacks Rank.

Constant Contact, Inc.

Constant Contact, Inc. (CTCT) provides engagement marketing tools available on demand. These are customized for small companies, non-profit organizations and associations. Among its prominent offerings are products which can be used for social media and event marketing, email marketing as well as survey tools.

Constant Contact, Inc. holds a Zacks Rank #2 (Buy) and has expected earnings growth of 98.00%. The forward price-to-earnings Ratios (P/E) for the current financial year (F1) is relatively high at 53.70. However the price to sales ratio (P/S) is 2.9, lower than the industry average of 5.4.

RealPage, Inc.

RealPage, Inc. (RP) offers demand software solutions aimed at the housing rental sector. Among the company’s products are property management systems and seven groups of valued added services which are software enabled. The company made important acquisitions last year, such as Windsor Compliance, a compliance monitoring services company.

Currently the company holds a Zacks Rank #2 (Buy) and has expected earnings growth of 32.50%. It has a P/E (F1) of 39.53. At 4.3, the company’s P/S is lower than the industry average of 5.4.

Rackspace Hosting, Inc.

Our third choice is Rackspace Hosting, Inc. (RAX). The company has a wide range of cloud computing products. This includes public, private, dedicated and hybrid hosting. Operating across 120 countries, the company has a presence in Zurich, Hong Kong, Sydney and Amsterdam, aside from the U.S.

Besides a Zacks Rank #2 (Buy), RAX has expected earnings growth of 19.60%. It has a relatively higher P/E (F1) of 50.48. However, its P/S is 3.6, lower than the industry average of 5.4.

With major tech players increasingly focusing on the cloud, this domain may offer significant growth in the future. Operating exclusively in the cloud business, these companies may be best placed to leverage those gains and would make good additions to your portfolio.

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