We believe that a continued rapid consumption of network capacity, driven by a rising use of tablets and smartphones, will propel companies operating in the cloud computing and wireless network optimization space. In the interim, these companies are seeing a slowdown due to uncertainty in the economy, which has led to IT budget cuts. It appears that several funds are making moves into the cloud computing space in preparation for a future shift in enterprise technology that includes data center consolidation and virtualization. The five companies below are some of the top ways to play cloud computing—and include shareholders such as Jim Simons, D.E. Shaw, Steven Cohen and Ken Griffin.
The traditional data networking company, Cisco Systems, Inc. (NASDAQ:CSCO), is in competition with server and computing players for market share in the cloud computing and wireless area network optimization—see our other thoughts on Cisco. Cisco, being a $100 billion market cap company, has attracted some big name interest, including Ken Fisher and D.E. Shaw. Also, as of 2Q, Cisco was an Edinburgh Partners’ Top Pick and saw five funds with over 5% of their 13F portfolio invested in Cisco—see all funds owning Cisco. There have been a round of insider sales of late around $19, which is where the company currently trades. With Cisco’s initiative to focus on data storage partnerships versus acquisitions, the company is expected to grow EPS by only 7.7% next year.
F5 Networks, Inc. (NASDAQ:FFIV), even with an uncertain U.S. and European outlook, is expected to grow 2012 revenues by 20%. The stock is down almost 24% over the last four months, but 2Q guidance showed a positive outlook. Analysts have mixed feelings on F5; the company recently saw a downgrade at Barclays Capital, a reaffirmation at Piper Jaffray and MKM Partners, and an upgrade at Deutsche Bank. Also worth noting, like Cisco, there have been a number of recent insider sales at F5. Jim Simons was the top fund owner as of 2Q, with almost 900,000 shares. Steven Cohen and D.E. Shaw were also prominent shareholders.
Riverbed Technology, Inc. (NASDAQ:RVBD), to join the other companies thus far, has a prominent number of insider sales. Of these five stocks, Riverbed has some of the least interest from funds. However, a couple top names that own over 500,000 shares are Cliff Asness and Israel Englander. Sales growth is expected to expand by 15% in 2012, with strong demand for wide area network (WAN) application traffic management, which is expected to also drive 18% growth in 2013. Riverbed has a leading position in the under-penetrated WAN market, but the possible pull back on spending by enterprise customers is keeping the company under pressure.
Juniper Networks, Inc. (NYSE:JNPR) recently announced plans to layoff over 5% of its workforce. Although the company has not said specifically, speculation is that the cuts will be in Juniper’s QFabric line, which is their data center segment. This might be an indication that Juniper is losing the data center battle against Cisco, who entered the market earlier and already has an existing enterprise presence. The company currently trades at a 35 P/E, and is expected to post full year 2012 EPS down 35% from 2011. Even with this outlook, Juniper has attracted Ken Griffin and D.E. Shaw as two of its top fund owners, with both upping their 1Q stakes by over 70% each. In addition to those two, Steven Cohen took a new position in the company during 2Q.
Ciena Corporation (NASDAQ:CIEN) saw Empire Capital Management increase its stake over 70% to now own over 2.3 million shares. Other investors increasing their stakes were George Soros, Chuck Royce and Steven Cohen. Ciena is expecting strong growth in the coming years, partly driven by its acquisition of Nortel’s Metro Ethernet Networking business. Sales are expected to increase 9% in 2013 and 11% in 2014. Much like the aforementioned companies, Ciena’s other growth driver is the continued rapid increase in network bandwidth consumption.
In general, communication equipment suppliers and cloud computing companies have seen weakness due to the macr0-economic environment, but we agree with Gartner’s assessment that Cloud will be a top priority for companies in the coming years. The idea being that IT can now provide value to a company, beyond just being a cost. Of the companies, Cisco trades the cheapest on a P/E basis at 12x, and pays the only dividend among all the companies—a 3% dividend yield. However, we believe that Cisco has the least number of growth opportunities, while F5 may have some of the highest. Next to Cisco, F5 is the cheapest on a P/E basis at 30x, but trades at a forward P/E of 20x. For a full look at the hedge fund industry’s sentiment toward these stocks, check out Insider Monkey’s hedge fund database.
