Cisco Enters Cloud Market the Day Before Google Slashes Cloud Prices

 

Yesterday, Reuters reported, “Cisco Systems Inc. (CSCO) plans to begin offering ‘cloud’ computing service to corporate customers, pledging to spend $1 billion over the next two years to enter a market now led by Amazon.com Inc. (AMZN).“

This afternoon, Google Inc. (GOOG) announced that it will slash its cloud computing prices up to 85% in order to steal market share from Amazon and Microsoft (MSFT).

I’m thinking that the Sales Director at Cisco Systems just lost his appetite for dinner.

“Cloud computing” refers to the practice of renting computers and data storage to companies and individuals, whereby the customers avoid expensive hardware investments.

Let’s get down to brass tacks and figure out what to do with these stocks.

As a refresher —  and maybe as a surprise to some subscribers —  I make all my stock decisions after spending approximately 60 seconds looking at numbers and charts.  Yeah, it’s a “Rain Man” thing, but it works.  And so I’m never going to agonize over daily news stories; I’m going to stay focused on the process that I’ve already developed, which very effectively identifies good growth stocks, and minimizes risk.

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AMAZON.COM INC. (AMZN, $354.71)

Internet retailer Amazon.com will likely follow suit with Google’s change in cloud pricing.  Earnings per share (EPS) were projected to grow 225%, 120% and 102% in 2014 through 2016 (December year-end), prior to Google’s announcement.  The 2014 PE is 185.

On July 29, 2013, I discussed Amazon’s ridiculously high PE.  I told lucky shareholders to hold their shares, due to the bullish chart, and to use stop-loss orders.

AMZN shares reached all-time highs in January, then fell, and have recently traded in the $337-$379 range.  If the stock falls tomorrow (March 26) on the Google news, I would expect it to find new support around $320-$324.

This is a tough call.  We’re looking at a stock with strong future earnings growth, a neutral chart, a huge PE, and bad news today.  If I’d owned the stock, I would have gotten stopped out on January 31, because I generally use stop-loss orders, especially after big price run-ups.

If I owned it today, and it falls through support tomorrow, I would sell.  If it held support, I’d plan to sell on a rebound to $375.

Goodfellow LLC rating: Sell, Aggressive Growth, Public.  (03-25-14)

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CISCO SYSTEMS INC. (CSCO, $22.34)

The excitement over communications equipment company Cisco System’s entry into cloud computing will be quickly offset by cloud price competition, and lack of growth in their current businesses.  Cisco’s EPS are projected to fall 1.5% in 2014, followed by growth of 6% and 9% in 2015 & ’16 (July year-end).  Full-year 2014 performance is expected to include decreases in gross & operating margins, and revenue.  Demand is falling in emerging markets.

The stock’s 2014 PE is 11.2, and the dividend yield is 3.40%.

On October 3, 2013, I said to sell CSCO.  The stock continued falling, and hasn’t recovered.  Then after the fall, on  Nov. 14, 2013, I told shareholders that they’d get another chance to sell on a rebound to $23 in the near-term.  That opportunity arrived in mid-January.

There’s still strong price support at $20, and resistance at $23 and $26.  If somebody gave me these shares, I’d put in a sell limit order at $22.75, and be done with it.

Goodfellow LLC rating: Sell, Public.  (03-25-14)

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GOOGLE INC. (GOOG, $1,158.72)

Google Inc. is the world’s largest technology company.  Its aggressive price-slashing might bring in new customers, but it will be many months before resulting revenue growth affects earnings.  EPS are expected to rise to 17%, 18% and 16% in 2014 through 2016 (December year-end).  The 2014 PE is high at 22.5.

The stock is experiencing a small pullback, after reaching all-time highs in February.  I wouldn’t buy shares here, because they’re somewhat overvalued, and the chart is recently neutral.

See my comments from January 14, with links to prior articles.

Goodfellow LLC Rating: Hold, Aggressive Growth.  (03/25/14)

*Note from Crista Huff — I have owned Google shares for quite a few years.

 

MICROSOFT CORP. (MSFT, $40.34)

I discussed Microsoft quite a bit on March 18.  “Microsoft shares do not have a ‘buy’ rating at Goodfellow LLC because earnings per share (EPS) are projected to grow quite slowly: 2%, 7%, and 9% in 2014 through 2016 (June year-end).  The 2014 PE is 14.6, in the middle of a six-year range of 9-19; and the dividend yield is 2.83%.”

“Microsoft shares broke through six-year price resistance in November, traded sideways for about four months, then broke out on the upside today with heavy volume.  I expect the shares to continue rising immediately.”

“The stock is overvalued based on slow earnings growth and comparably high PE; but the chart is undeniably bullish.  If I owned MSFT shares, I’d keep them, and use stop-loss orders to protect my downside.”

Goodfellow LLC Rating:  Hold, Public.  (03-25-14)

 

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Happy investing!

Crista Huff

President

Goodfellow LLC

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