MorningWord 2/13/15: “What the Hell Is Cloud Computing??” $CRM, $ORCL

by Dan February 13, 2015 9:38 am • Commentary

You’re probably already prepared for the impending breakout of almost every major equity index to new highs.  Stocks feel like they are ready to party on the slightest bit of good news, or perhaps merely less bad news.  Yesterday I took a look at the Russell 2000 (in IWM terms) as it approaches the prior highs for the fourth time in the last year:

A breakout of the Russell would show a healthy broadening out of the bull market. Will the 4th attempt in a year at new all time highs be the one?

IWM 2yr chart from Bloomberg

But as a trader, playing an index breakout is not that attractive, and I concluded:

At this point I’d rather play for single stock breakouts than that of a broad index, I think you get more bang for your buck, but this set up looks attractive for those that think the rally broadens out and want to participate with options rather than stock.

But are there single stock candidates with improving technicals and an upcoming catalyst that could breakout outside of the broad market trend?

Look no further than (a fairly wide range of) software stocks, many of them obscenely expensive and almost all now reffered to as Cloud Computing stocks.  Back in 2008, Oracle (ORCL) CEO Larry Ellison famously made fun of the term Cloud Computing as just the latest fad in tech writer terminology (listen here) and boldly asked the question “WHAT THE HELL IS CLOUD COMPUTING?” He has changed his tune a bit now, but he was right about the label being applied slyly to too many different things. In the last year or so it seems like cloud is the new dotcom and all a company has to do to see a pop in their stock is mention some move “into the cloud.” Great, you have software stored on servers and available on THE INTERNET. How groundbreaking.

We’ll eventually look back at this period and laugh at some of the lengths companies went to to make sure people knew they were in the cloud, but for now, for those looking for breakout candidates, some of these cloud plays fit the bill:

Adobe Systems (ADBE):  company reports fiscal Q4 on March 17th, the stock made new all time highs back on Dec 11th, rising 9% in one day on a beat and raise, maybe the stock runs in front of the print.  The stock is not cheap, trading at 7.5x 2015 expected sales  expected to see a big jump to to almost $5 billion in 2015 up 18% year over year as migration to cloud offerings supposed to boost sales:

ADBE 1yr chart from Bloomberg
ADBE 1yr chart from Bloomberg (CRM): reports their Q4 on Feb 25th.  The stock has under-performed over the last year trading in a fairly tight range between $55 and $65 for the last year.  Yesterday the stock rose 4%, making new two month highs, could it be building steam for a move back to and possibly above the prior highs?

CRM 1yr chart from Bloomberg
CRM 1yr chart from Bloomberg

Oracle (ORCL): now benefiting in investors eyes given their ambitions to do what they were doing before, wait for it, now in the cloud.  The company reports fiscal Q3 results March 18th. To be fair, one of the main reasons for CRM having a nearly $40 billion market cap is due to Ellison’s early skepticism.  Regardless, ORCL is threatening a breakout of its 2000 bubble highs, and does not trade at 80x expected earnings:

ORCL 15yr chart from Bloomberg
ORCL 15yr chart from Bloomberg

ServiceNow (NOW): Yep trades 150x expected earnings, 11.5x expected sales, wow.  But a beautiful technical breakout is occurring as I write:

NOW 5yr chart from Bloomberg
NOW 5yr chart from Bloomberg

I would add one more name. MSFT’s new CEO Satya Nadella has pegged much of his early efforts to move MSFT’s core Office and Windows to the Cloud, but with the stock recently lagging, the new CEO could be forced to make his own mark on the stock and look for a higher growth company to help transform their existing business.  Does MSFT use some of their $90 billion in cash to buy a ADBE, CRM or NOW??

But the point is the charts above (aside from MSFT, read our new Trade in the stock from yesterday here), look healthy in a raging bull market sort of way, and could be some great candidates to play a broadening out of the rally if we are to make an explosive breakout to the upside.