Investors still waiting for shares of Microsoft Corp. to break out of their 10-year funk might want to switch gears to the post-PC era.
This is the new world where bulky software that bogs down your computer is replaced by online services delivered over high-speed wireless networks and onto devices that fire up in seconds instead of minutes. And it's a place that is increasingly dominated by three public companies and one social networking giant.
Apple Inc., Google Inc., Amazon.com Inc. and Facebook Inc. are at the forefront of the move to cloud computing, which promises to be a subscription gold mine for the companies that can build the best "ecosystems" encompassing apps and services.
"We've never had four companies growing at the scale that those four are in aggregate, in customers, cash flow, partners, software development tools, and so on," Eric Schmidt, Google's executive chairman and past chief executive officer, told a Wall Street Journal conference this month. He calls this troupe, the "gang of four."
No one at this point can accurately predict which of these companies will eventually come out on top. But for investors, one smart move is to place bets on all three (Facebook still hasn't committed to an IPO).
In the post-PC era, the emphasis is no longer on who controls the desktop operating system, but who has the best platform to connect devices and cloud services.
The "cloud" refers to a model where files are stored in remote data centres and synchronize automatically with changes made at the device end. The benefits include backed-up data, less clutter on the user's device and the ability to access the content from multiple devices through an Internet connection.
Cloud computing was pushed more than a decade ago by companies such as Sun Microsystems Inc. as a means to side step cumbersome operating systems from Microsoft. But the idea was ahead of its time, and only recently became practical after the introduction of high-speed wireless networks and more powerful handheld devices such as Apple's iPad and Google's Android-powered smart phones.
Apple is arguably in the lead, with some of the best-selling hardware and market-leading online content. This week, chief executive officer Steve Jobs introduced the company's iCloud service, which will collect all of a user's content, from music to videos to documents, and place it on Apple servers accessible from other Apple devices.
"We are going to demote the PC to just be a device. We are going to move the digital hub, the centre of your digital life, into the cloud," Mr. Jobs told a San Francisco audience on Tuesday.
Highlighting how powerful Apple has become in this shifting landscape, recent data from research firm IHS iSuppli show that the Cupertino, Calif.-based company is now the largest purchaser of semiconductors, topping even Hewlett-Packard Co., the world's No. 1 computer maker. At a time when the smart phone market is outgrowing the PC market by more than fourfold, Apple spent 61 per cent of its semiconductor budget in 2010 on wireless products. In comparison, Hewlett-Packard spent 82 per cent of its budget on desktops, notebooks and servers.
"Apple remains the best technology company on the planet with numerous catalysts on the horizon," says Brian Marshall, an analyst with Gleacher & Co. in San Francisco. The company's business model is becoming stronger all the time. International sales of iPhones are in early innings, it enjoys an increasingly rich revenue mix and it is adding to its $65.8-billion (U.S.) cash horde at a rapid clip, he says.
Mr. Marshall rates the stock a "buy" with a price target of $450. That value is based on 13 times next year's estimated share profit, plus 70 per cent of net cash that the company boasts (about $70 a share).
Mr. Marshall says potential challenges for Apple in the future include a slowdown in the expansion of international smart phone sales, a decrease in the relatively high subsidy that wireless carriers pay the company for each iPhone activation, and any decline in innovation - currently led by Mr. Jobs.
Both Google and Amazon bring their own unique strengths to the cloud computing market. Amazon's Web services unit has been selling companies cloud services for five years, allowing them to ramp up storage and requisition computing power as needed. In March, Amazon stepped into the consumer cloud space, launching a music streaming service called Cloud Drive.
Building on the success of its Kindle e-reader, the company reportedly plans to introduce its own tablet computer in the next year, running on Google's Android platform. Amazon is also poised to start its own publishing arm shortly.
Heath Terry, of Canaccord Genuity Corp. in New York, rates the shares a "buy" and has a $220 price target on them, computed at 37 times next year's estimated share profit, excluding cash.
Google, meanwhile, has commandeered the largest share of the smart phone market with its Android software, which it gives away to handset manufacturers. It hopes that the proliferation of Android devices will seed the market for its online services, which generate advertising revenue.
Last month, Google began allowing individuals to rent and stream movies through its Android Market and YouTube video site. It is also testing a music cloud storage service called Music Beta. But similar to Amazon, it has so far been unable to negotiate licensing agreements with the major record labels, putting it at a disadvantage to Apple.
Google also recently introduced Chromebook. The device, made by Samsung Electronics Co. and Acer Inc., builds upon its Chrome operating system, introduced in 2009, which acts like a Web browser and stores all data online.
Sales growth: 52%
1-yr return: 33%
Sales growth: 24%
1-yr return: 7%
Sales growth: 39.6%
1-yr return: 58%
P/E is trailing 12-months; price-to-book is last quarter; sales growth is last fiscal year.
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