Get Your Head in the Clouds

04/29/2013 7:45 am EST

Focus: STOCKS

This small-cap company is leading the charge in cloud computing, says Michael A. Robinson of Money Morning.

Cloud computing is one of the hottest new tech trends in many years. The respected research firm Forrester predicts the cloud computing industry is going to increase from about $41 billion in 2011 to $241 billion in 2020-and an increase of roughly 487% over a nine-year period.

No doubt, cloud computing is a bit of a fuzzy term for most investors. So, I'll simplify it for you: The "cloud" generally refers to hosting data and applications offsite, often by third parties.

In other words, it represents the shift from PCs and laptops holding all the information people need, to storing much of it at remote locations. That also includes the Web and private clouds, which are also known as remote data centers.

Cloud computing allows corporate IT departments to get leverage to more services and productivity tools without buying and running their own computer servers and related gear. And even if the Forrester prediction comes up short, and true sales come in at just a third of that estimate, we're still talking about massive growth by the end of this decade.

This is a huge tech trend you can make money off tomorrow-not years down the road. Against this backdrop, there is one small-cap cloud computing company that had no trouble recognizing a brilliant opportunity when it saw one.

Datalink (DTLK), with a market cap of only $209 million, is on an absolute tear. In its most recent financial report, the firm said it grew 24% in the quarter alone. Meanwhile, thanks to a heavy investment in cloud, Datalink shares are up 76% in the past two years.

And since Datalink still has plenty of room to grow sales and earnings, its stock price is nowhere near all-time highs.

The key is that as a competitor with Oracle (ORCL) and other big computing firms, Datalink has found a very simple sales angle. Datalink enables firms to convert their existing data center into clouds without a lot of the normal headaches and snafus.

This is a ready-made market, because thousands of clients are interested in moving to the cloud, but don't just want to write off all the money they've already invested in their data centers. That's where Datalink's "On Demand Labs" comes in. This service lets potential buyers design and test a working cloud before they have to make any major investment decisions.

Think of it as a test drive, but one with a great upsell opportunity attached. The firm also helps clients implement the final plan, complete with metrics to show other execs just what to expect as part of the conversion.

One of the biggest boons for cloud services is in the key role it can play in marketing. And that's obvious from just a quick glance at Datalink's Web site.

It is targeting Fortune 500 firms with an eye toward repeat business. Of its roughly $500 million a year in sales, about $160 million stems from recurring service contracts.

And the best part is, the stock is still cheap. With a recent share price of around $11.25, DTLK trades at just ten times forward earnings and just .42 times sales with a PEG ratio of only .59.

Of course, no stock is ever picture perfect. As a long-time tech investor, I'd like to see higher profit margins and better returns on assets and equity.

I still think Datalink has plenty of room to run. We're still in the early stages of the cloud buildout, and this small-cap leader has found a way to put the Big Boys like Oracle back on their heels.

Read more from Money Morning here...

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