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Get Off of my Cloud Computing – Competition in the ‘Cloud’

LONE PINE CAPITALCloud computing is the biggest thing since smart phones. The ability to store all your media and files in a “cloud” makes syncing between devices a snap and collaboration easier than ever – and, besides, it’s just plain cool. So, it’s no wonder that so many companies are chomping at the bit to get involved. Amazon (AMZN) offers a cloud service that it debuted by giving its Prime members a free year-long trial, and Apple (AAPL) has its iCloud, made standard on its iOS5 and OSX Lion. Then, there are the companies that just do cloud computing, like the privately-held Dropbox and Box.net. In other words, the competition is fierce, but cloud computing is also fiercely popular – enough to support a wide range of contenders, for now at least.That could all be changing. Hedge fund favorite Google (GOOG) is launching an online storage service to rival the largest of the cloud computing services. The new service is called “Drive” and it is expected to launch in a few weeks. Like its rivals, Drive will let users store documents, photos and videos on Google’s servers so that they are accessible anytime the user has an Internet connection. Also, like its rivals, Google Drive will provide a small amount of storage for free, charging a fee only to those consumers and businesses that want to store a large amount of files. People close to the matter say that Google plans to charge far less for its cloud computing service than its competitors.

“Google previously contemplated a cloud-storage service. Five years ago, Google co-founder Larry Page, who is now the company’s chief executive, worked with teams of programmers to develop a service, known internally as ‘G Drive,’ to let people store music files and other data online, according to people familiar with the matter. It was set to launch in late 2007 but never did,” reports the Wall Street Journal. “Since then, Dropbox, founded in 2007 by two graduates of the Massachusetts Institute of Technology, has skyrocketed in popularity. As of October 2011, Dropbox had more than 45 million members who saved one billion files every few days.”

Google’s Drive is its latest effort to compete against the myriad companies that are popping up with new, competitive technologies. “Last year, the company released Google+, which aims to compete with social-media sites Facebook Inc. and Twitter Inc. Google Currents, a mobile-device app that lets people read news articles, was launched last fall and is viewed as a competitor to Flipboard Inc. and other such apps. Google also has developed services and bought business-reviews company Zagat to better compete with Yelp Inc.” Granted, Google has also had some flops, like Google Wave, a soon to be defunct communication and collaboration tool, and Google Buzz, a defunct micro-blogging and messaging tool, but we think cloud computing will be different.

The market is there, and still new enough to jump in. “World-wide, $830 million was spent on such file and back-up storage services in 2011, and that figure is expected to grow by 47% to $1.2 billion this year.” Plus, Google will have a unique edge if it follows through with plans to make cloud computing part of its wildly popular Google Apps, a suite of online software it provides businesses. Google can also benefit from economies of scale, giving it an additional advantage. Whereas competitor Dropbox is able to store up to 100 gigabytes per user (for a fee, of course), it is only to do so by piggybacking on another company’s infrastructure. “Dropbox is able to store so much data thanks to Amazon Inc.’s Web Services, a division that maintains a network of computers that stores data online. Amazon rents out this network to Web companies such as Dropbox, video site Netflix Inc. and social game company Zynga Inc.,” writes the Wall Street Journal. “Google already has a massive cloud infrastructure to store and power all of its services, from Web search and video site YouTube to Web applications such as Google Docs, which lets people create and work on documents and other files online.”

We think that Google is a great buy right now – and, with its Drive service on the horizon, we think that Google is going to pop. As of the end of trading on February 9, Google was priced at $611.46, or just 12.29 times its forward earnings, with a one-year target estimate of $702.03 a share – and the company could easily surpass that. It has strong earnings growth, growing 23.93% per annum over the last five years. Analysts estimate Google’s growth will continue at a rate of 18.39% per annum over the next five years, beating out expectations for its sector of 18.02% per annum. Google also has a strong nod from the hedge fund community. Stephen Mandel’s Lone Pine Capital had roughly $483.31 million in the company at the end of the third quarter. Ken Fisher’s Fisher Asset Management was also bullish on the stock. The fund had a position in Google worth roughly $362.60 million at the end of September.

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