How to Get Into Cloud Computing at a Reasonable Price

The cloud index rose by 107%, while the NASDAQ only went up by 58% in the last year. This trend is evidence that the general public believes potential in this type of technology.

Mar 17, 2014 at 1:32PM

Today, businesses are looking for ways to gather information quickly while keeping expenses low, and cloud computing offers just what companies need. Within the past year, investors have been snapping up shares of cloud computing companies, and the problem has become finding them at reasonable valuations. To put it in perspective, the cloud index rose by 107%, while the NASDAQ only went up by 58% in the last year. This trend is evidence that the general public sees potential in this type of technology.

Great company, but extremely expensive
Given the potential of the technology, valuations are through the roof. Ultimate Software Group (NASDAQ:ULTI), a provider of SaaS payroll solutions, has a forward P/E of 62.8 and an EV/EBITDA of 75. This isn't an EBITDA problem -- the EV is just huge. Applications stored on Ultimate Software's server are delivered to clients over the Internet on-demand. The remote storage enables cost cutting, application updates, international accessibility, and security. Costs are reduced because clients no longer need to buy and maintain physical servers in the office. Another important feature this company provides is the UltiPro Mobile. This mobile app enables teams to stay connected with each other globally, managers to view subordinates' profiles, and employees to update retirement contributions. Users can see each other's profiles, similar to Facebook. Ultimate Software has been recognized as leader of cloud-based payroll software because the services it provides continue to enhance the daily operations of clients. As a result, its financial performance has been excellent over the last few years. Cash flow from operations was $42 million in 2012 and $74 million in 2013. Investors quickly recognized the value of this company, leading to a 217.13% share price increase in just a few years.

Another great cloud computing company with an astronomical valuation is Athenahealth (NASDAQ:ATHN), which provides cloud computing services for electronic health records, practice management, and care coordination. One product, AthenaClinicals, manages health records electronically, allowing family doctors to conveniently access a patient's results. AthenaCollector helps doctors manage their practices through integrating operations such as scheduling, reminder calls, and accounting. AthenaCommunicator connects patients to doctors outside of the office, so both patients and doctors can view medical information, appointments, and payments. AthenaCoordinator assists caregivers, facilities, and patients by managing the flow of orders, such as tests and surgeries, between all parties. The company has operational cash flow of $70 million and $93 million in 2012 and 2013, respectively. Just like Ultimate Software, its valuation multiples are huge. It has a forward P/E of 135 and an EV/EBITDA of 129. This company also has no problem making money, and the valuation is massive due to the hype.

Larger companies such as Salesforce, Workday, and NetSuite have not been profitable, but have large valuations due to their potential.

Cloud computing at a good price
To move away from lofty valuations, look at companies that don't appear to be cloud computing companies on the surface. Recall (ASX:REC), an information management company that recently spun off a division of Brambles, makes most of its sales from physical storage, but is quickly growing its cloud-computing business to capture opportunities in upcoming market trends. It helps customers convert information to digital format and allows clients to access documents on various devices, including mobile phones. The cloud-based management system stores converted images and allows quick access for members of all departments.

Since its spin off, based on EV/EBITDA and forward P/E, it is currently undervalued compared to Iron Mountain and similar companies. Iron Mountain has significantly more debt than Recall, which boosts its EV. Recall has an advantage in the international markets, which will be a large source of growth for data storage. The company already has infrastructure set up and is ahead of the game. Transitioning from traditional physical storage to digital services could yield tremendous value for investors. Valuation multiples of cloud computing companies are, on average, two times more than those of Recall.

In conclusion, cloud computing is only getting bigger but investors need to avoid cloud computing companies with these massive valuations.  Look for the companies moving in the cloud computing direction. Recall has upside potential based on its current business in physical storage and on its future growth opportunities when it diverts more resources to cloud-computing. Now may be a good opportunity to buy this stock while it still priced at low multiples.

Get in on the cloud computing revolution
There are few things that Bill Gates fears. Cloud computing is one of them. It's a radical shift in technology that has early investors getting filthy rich, and we want you to join them. That's why we are highlighting three companies that could make investors like you rich. You've likely only heard of one of them, so be sure to click here to watch this shocking video presentation!

Mike Thiessen is long Recall Holdings. The Motley Fool recommends Athenahealth and Ultimate Software Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers