By Timothy Lutts, Chief Investment Strategist and Editor of Cabot Stock of the Month Report
From Cabot Wealth Advisory 7/26/10 Sign up for free Cabot Wealth Advisory e-newsletter
Today, the industry that’s booming, where the profit margins are high and the stocks are strong is ”cloud computing.”
Which is what, exactly?
Well, there is no “exactly.” Cloud computing, in general, refers to the increasing migration of computing resources (hardware, software, data storage, computing power and expense) away from the user and toward a provider … who might be located all the way across the country.
Cloud computing thus minimizes upfront financial expenses for users, while maximizing computing capability. Users typically pay using one of two models. They can pay based on usage, as you do for your electricity service. Or they can pay a set monthly or annual fee, as you do for your cable TV.
In some respects, the evolution of the computing industry is akin to that of the electric industry long ago. Originally, electric power was consumed where it was generated. Eventually, the build-out of the electric grid allowed the concentration of generating facilities as well as the distribution of consumption.
Now, how far this trend to cloud computing will go, no one knows. Will all data be stored at big central locations eventually, or will we continue to control some locally? All you need to know today is the trend is powerful, that numerous companies in the (admittedly roughly-delineated) industry are enjoying rapid growth of both revenues and earnings, and that many of their stocks are strong.
One provides “scale-out network-attached storage systems.”
One provides “application acceleration services.”
One manufactures “network storage and data management hardware.”
One provides products and services that “improve the accessibility of data over wide area networks.”
One provides “enterprise mobility software that enables secure access to data, voice and video applications over networks.”
One provides “on-demand customer relationship management software.” Yes, it’s the famous Salesforce.com (CRM).
And one provides “virtualization software that enables organizations to run multiple operating systems on a single computer.”
Some of these I’ve written about before and some I’ll write about again.
But today I want to focus on Acme Packet (APKT), the market leader in the “session border controller” industry. A session border controller is hardware and software that allows real-time communications across different IP networks, whether the content is voice, video or plain old data. These networks might be wired, or they might be wireless.
The company also makes session-aware load balancers, multiservice security gateways and session routing proxies.
Obviously, there are not household items. The biggest customers for this equipment are telecommunications companies, including Alcatel-Lucent and Nokia-Siemens. But if you consider the growing amount of IP networks and traffic traveling on these IP networks, and the prospect that this growth can continue for a very long time, you’ll understand why revenues have grown every year since the company’s first sale in 2003, why they grew at an impressive 65% rate in the first quarter, and why analysts are now projecting that earnings will grow 94% for the full year! Also, profit margins hit a very healthy 20.9% in the third quarter. And that’s a profit margin the folks at Tesla can only dream about.
I wrote about Acme Packet here back on May 10, when it was trading at 26. After that it pulled back to 24 several times, but it’s been generally trending higher, propelled by the buying of investors who are learning about its great growth potential.
Editor’s Note: If you bought APKT back on May 10, congratulations! I suggest you hang on tight. If you didn’t buy, and you think you’d benefit from hearing the fuller story—as well as getting regular updates, so you know when to sell—I suggest you take a look at Cabot Top Ten Weekly, which first recommended the stock in March when it was trading at 17. For more on Acme Packet and other top stocks, click here: Cabot Top Ten Weekly
President, Chief Investment Strategist, Editor of Cabot Stock of the Month
Timothy Lutts heads one of America’s most respected independent investment advisory services, publishing eight newsletters to more than 165,000 subscribers around the world. Tim leads a dedicated team of professionals who serve individual investors with high-quality investment advice based on time-tested Cabot systems. Under his leadership, Cabot has been honored numerous times by both Timer Digest and the Hulbert Financial Digest as among the top investment newsletters in the industry. Tim also edits Cabot Stock of the Month.
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The cool thing about this correction is that it provides a great opportunity to build a watch list, a list that you can use to “go shopping” when the pressure comes off the market. But how do you build a watch list? By watching charts, and digging for true growth stories.
Ideally, what you want to see are stocks that resist the broad market’s selling pressure, stocks that are not yet well-loved (or even well-known) but that demonstrate the growing presence of institutional support, and stocks of companies that have great growth prospects.
Here’s a stock that has been featured in recent weeks in Cabot Top Ten Report. It’s a technology stock with great growth prospects, not least because demand is growing fast for its products!
Back on March 1, editor Michael Cintolo wrote this:
“Acme Packet (APKT) is the leader of the session border controller market. The 1% of you who know what that is may already own the stock. To the rest of you, we’ll explain. A session border controller is a box that controls the activity of a VOIP (Voice Over Internet Protocol) call as it passes from the border of one network to the border of another. The networks might be two ISPs, or even two networks of one business enterprise. In any case, the session border controller protects the networks, ensures quality of service and gathers statistics that empower managers to optimize performance. And business is very good, as more and more phone calls move to the Internet. The company was founded in 2002, and has grown revenues every year since. Profit growth has not been quite as smooth, but the company exceeded analysts’ expectations in the fourth quarter of 2009, and raised guidance for 2010, projecting that revenues would range from $182 to $186 million, and earnings would range from $0.44 to $0.47 per share. Note: 42% of revenues come from Alcatel Lucent, Nokia Siemens and Sprint. Fundamentally, we like it.”
Mike liked it so much, in fact, that he named it Editor’s Choice that week. It was trading at 17. Since then APKT has earned a spot in Cabot Top Ten Report three more times, most recently last Monday when it was trading at 27.
The market wildness on Thursday took it down (briefly, of course) to its 50-day moving average at 20, but it’s bounced right back up, showing strong institutional support, and I think it has further to go.
Editor’s Note: If you’d like Mike’s latest opinion on Acme Packet (APKT), as well as immediate access to future recommendations of Cabot Top Ten Report, I suggest you take a look here:
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|Acme Packet (APKT)
71 Third Avenue
Burlington, MA, U.S.A. 01803
Index Membership: N/A
Industry: Communication Equipment
Full Time Employees: 474