Hyper Growth Phase For Software As A Service (SaaS) Spurs Rapid Development Of Equity Valuations For Selected Data Center And Data Storage Stocks
January 28, 2010 - The Wall Street Transcript has just published Internet Services Report offering a timely review of the Internet Services sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
Todd Weller joined Stifel Nicolaus in 2005. He covers the software and Internet infrastructure sector, with a current focus on data center/hosting, health care information technology, infrastructure software and security. He previously worked for Legg Mason, Prudential Securities and BT Alex. Brown, Inc.
TWST: How much growth do you see for cloud computing in 2010? And of the companies in your coverage universe, which do you think are best positioned to take advantage of that growth?
Mr. Weller: I still think it's a very early-stage market. I think there was actually an article recently in Information Week talking about cloud being at the pinnacle of the hype cycle at this point. So still early, it's still small. I think you'll see hyper growth associated with it. One of the challenges with this is how do you define cloud computing because there are different angles to it. But I do think you'll see kind of rapid growth where more companies are looking to leverage computing, like Amazon's (AMZN) Web services or Rackspace's (RAX) cloud. Doing more software as a service will continue to be popular. So I think if we experience very solid growth, that will be on a small base.
You have another whole angle, which doesn't really necessarily relate to Internet services, around regular companies building their own internal clouds. They call those private clouds, and that's where they're leveraging technology from a company like a VMware (VMW), for example. As far as the companies in our sector, we really view cloud as another driver of demand for data centers and for hosting companies.
For example, Salesforce.com (CRM), the largest software-as-a-service provider, doesn't operate its own data centers They are a customer of Equinix. And so we think Equinix (EQIX) should benefit as cloud service providers and others look to extend their data center space. Rackspace gives you another play on the cloud, where they are operating their own cloud service. So we would call them more of a cloud services provider as opposed to Equinix, which has more of an infrastructure play on it. And so Rackspace is directly competing against the likes of Amazon. So that cloud for Rackspace is about 10% of its revenue, and we expect rapid growth in that area. But it will still represent a smaller piece of their revenue relative to the managed hosting business.
TWST: You wrote in your VeriSign (VRSN) report that the analyst meeting reinforced the lack of reasons to be interested in the name. But I believe you still have a buy rating on it. Would you elaborate on your thoughts on the stock right now?
Mr. Weller: I'd rephrase that a little bit and just say that coming into the analyst meeting, I think that a lot of investors were looking for newer reasons - give me something exciting to think about, to get more interested in VeriSign. I don't think anything in the analyst meeting was really all that new - or if you sat through the meeting, you walked out of there saying, "Hey, I'm changing my opinion on VeriSign either significantly positive or significantly negative." The only things they talked about really were some new services they called trust services, but they really didn't describe that.
So if we kind of fast-forward though, I mean, our whole point on VeriSign was that we felt like investor interest over the course of 2010 would increase, and what would drive that increase was improved growth. And we're starting to see some catalysts in that regard. So unit growth in their domain name business was very good in Q3; it's going to be very good in the fourth quarter. You also had the recent announcement by VeriSign of the price increase for domain names. So to give you an example, if they would have announced that price increase at the analyst meeting, there would have been a nice reason for people to walk out of there more positive. But it was really, I'd say, more of a timing thing. Though the price increase announcement, when it came, was earlier than we were anticipating.
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