“Make a Fortune on ‘The Facebook Effect’: The New ‘Lord of the Cloud'”

By Travis Johnson, Stock Gumshoe, June 16, 2011

It’s been a little while since we dug into an Oxford Club promo, so this latest one that uses the eventual Facebook IPO as a hook caught my attention … in exchange for signing up for a membership in this particular club, they say you’ll “learn everything about making money from the ‘Facebook Effect.’”

No, they’re not actually trying to sell you Facebook shares — though plenty of folks will no doubt jump on that bandwagon when they go public, probably next year. The Oxford Club folks appear to believe, to shorten it a bit, that there will be a predictable mania from the Facebook IPO that makes other stocks go up, including some that they tease in this ad which have no substantial direct connection to Facebook.

So will one of these ideas be a better investment than waiting around for the Facebook IPO? I confess that I was tempted earlier this year to invest in the only real public access to Facebook shares (that being through Mail.ru, which owns a small slice of Facebook, as well as Groupon and Zynga shares) … but though it was looking good for a little while in late March, the price didn’t get down to my buy level before the Yandex IPO, and after the brief spurt of YNDX mania hit Mail.ru climbed and hasn’t looked back. Hasn’t even fallen down as much as YNDX did post-IPO, unfortunately.

Though now that you mention it, that’s a small validation of the larger scheme here — when a hot IPO increases attention in one smallish sector, the other stocks in the sector sometimes get a valuation bump-up.

I’ll go off on a quick aside: If you’re unfamiliar with the Mail.ru story, they’re listed at MAIL in London (though priced in dollars — there is a “grey sheets” ticker at MLRUY but I’ve never seen it traded) and their primary assets are the Mail.ru portal, which is kind of like Yahoo, some smaller social networks, a large chunk of VK.com (“Russia’s facebook”) and small chunks of venture capital investments in those silicon valley names I noted above, including facebook. If you value facebook at $100 billion and believe Groupon’s really worth $20 billion as they’re hoping, then Mail.ru’s holdings in each (2.38% of facebook, 5.13% of Groupon) could be worth roughly $3 billion, close to half of Mail.ru’s roughly $7 billion market cap. That’s what tempted me — I don’t know enough about the Russian businesses to value them appropriately, and clearly there’s reason for to price in a margin of safety for any Russian company even though they seem to be growing nicely, but I would probably have bought shares if Mail.ru dropped below $25 (roughly a $5 billion market cap).

But anyway, that’s not what we’re talking about with this Oxford Club “Facebook Effect” — in this case we’re told that we’re in the midst of a “new tech boom” … here’s how the pitch begins:

“All of Silicon Valley is texting, tweeting, gabbing and guffawing about it. Coffee shops are jammed with techies trying to work an angle on it.

“Last time I heard chatter even close to this was 1995 – the year Netscape soared 167% on its IPO and the analyst Steve Massocca called it “the beginning of fundamental changes on Wall Street.”

“Those were great times to be investing, and even greater that they lasted five long years.

“Yet when we look back on that Netscape IPO, and on the Google IPO a few years later, there’s something VERY important that most investors miss…

“Netscape and Google? They were the DiMaggio’s of the first tech boom. We knew their names, knew their stories. But what about the rest of the players?

“What about the other stocks that didn’t get all the press and the spotlight moments?

“Stocks like TheGlobe.com that rewarded early investors with actual 606% gains, and WebMethods which gave early and smart investors 508% gains, and Akamai Technologies which made early and smart investors rich enough for life.

“How Do You Book Gains of 508% and More on the New Tech Boom?

“These are the stocks that were in the game, making money for investors, but overshadowed. There’s a name for these tech stocks.

“We call them the ‘pacesetters.’

“They set the pace for the stock run-up in advance of a big-name IPO. And, they’ve often delivered far larger gains to investors.”

So what are these “pacesetters” that the Oxford Clubsters think are “practically required to move up” while the big-name IPOs get all the attention?

Today I’ll focus on sniffing out the first one for you, since they say that’s where their “excitement runs highest” …

“PACESETTER COMPANY #1:Throwing elbows with Amazon and Microsoft for control of the internet’s most lucrative sector, this little-known firm is slated to grow 300% by 2014. “

300% by 2014 sounds pretty good to me — so who is it? Never fear, we get a few more clues in this bit:

“PACESETTER #1: The New ‘Lord of the Cloud’

“This company is elbowing into the same league as Microsoft and Amazon as one of the ‘Lords of the Cloud’.

“You’ve probably heard of this thing they call ‘the Cloud’ and how the whole computer world seems to be ‘evaporating’ into it. Let’s put our heads in this cloud for a minute, because it matters…

“In a nutshell, the computing business is starting to resemble the electricity business.

“In electricity, back in the day, big users would set-up and run their own generators. In time, electricity got cheaper and it got smarter to buy it from a big provider. That’s what’s happening now with computing.

“Big companies like Amazon, Microsoft, and Pacesetter #1 rent out computing power for pennies an hour. They’ve built buildings bigger than baseball stadiums all around the world, and they’ve packed them with computers to handle all the business they’re getting.

“Companies are happy to toss their computing headaches into the Cloud. Let someone else handle it.

“However, it’s still early in this game. One of the finest publications in the east, Silicon India, reports that less than 20% of the world’s companies are using the Cloud now… but almost 90% are planning to in the next three years.

That translates into millions of new users and a steep growth curve for Cloud computing….

“… Pacesetter #1 is an internet hosting company – they host the websites of some 100,000 businesses in more than 100 countries. Every time someone visits one of those websites, a little more coin turns up in its coffers.

“Every time a new network is set up, every time a web conference runs, every time an email or text is sent, a little more coin changes hands….

“And the move on this stock has begun.

“It’s up 39% this year and even if there was no “Facebook effect” propelling it, and it just keeps growing the way it has since the 2008 crash, it could be turning in 112% annual returns….

“And the best thing about Pacesetter #1 is the guys running it. They’ve got skin in the game. They don’t get paid the big bucks unless their stock returns beat out the top performers in the industry. So their interests are aligned with investors.

“Ideally this is a stock purchase we recommend making soon.”

So not a huge number of clues, but perhaps enough for the Thinkolator? Only one way to find out — time to wheel it out of the garage, pull the rusty starter motor good and hard, and fill up our hopper with these thin clues. A godawful racket ensues, but out the other end comes our answer, plain as day … this must be Rackspace Hosting (RAX).

You’ve probably heard of Rackspace, if you pay any attention to tech stocks — this is certainly not the first time they’ve been bandied about as a “cloud computing” investment idea, I wrote about it last December when the Motley Fool folks started including it in their “Kings of Cloud Computing Version 2.0” promo pitch. It’s up about 30% or so since then, which ain’t bad — though RAX was one of the last IPOs to come flying out of the gate before the 2008 crash, so if you’d been prescient about the cloud during the downturn you could have perhaps picked up the shares for less than five bucks after it dropped from the $12.50 IPO price.

And yes, they are a hosting company — one that, if you believe their self-description, tries to differentiate itself primarily with service (they’ve apparently registered the phrase “fanatical support” with the trademark office). They offer all the stuff that you’d expect from a hosting company — “cloud” hosting, managed hosting, email servers, Microsoft Exchange, security, backups, etc.

They do, just to dot the i’s on the teaser, claim more than 100,000 customers across more than 100 countries (more than 120 now, I think). And the stock has been up by 39% this year, though of course it depends on exactly which day you check — and they included a little chart in the teaser, which this stock’s chart matches quite nicely, so I’m fairly sure the Thinkolator is right once again.

Does that mean you need to buy Rackspace? Well, you’ll have to have a lot of faith in their “fanatical support” to justify it — not that it’s not deserved, because it might be, but the stock is looking quite pricey by most conventional measures. The trailing PE is right around 100, forward estimated PE is at about 50 — according to the analyst estimates they’re expected to grow earnings by about 50% both this year and next year, so if they can keep that up for longer than a couple years you can certainly justify paying 50X next year’s earnings. If they can’t keep up that earnings growth, well, that’s a tough sell.

The company has grown their profit margins by a little bit over the few years since their IPO, but the net profit margin has remained pretty steady at about 6% over the last four quarters — which means that unless they find a way to increase margins somehow, which I presume is difficult in a very competitive business like hosting, they have to keep increasing sales pretty dramatically to put up earnings growth numbers that catch investors attention.

I don’t know much about the business, other than as a small customer for a few similar companies, so I can’t tell you if RAX is doing something really unique beyond focusing on service — that’s probably the key for deciding whether or not you think the company deserves this valuation. Right now the Yahoo Finance calculates their PEG ratio (price/earnings/growth) at well over 2, which is pretty high (Peter Lynch-ians look for PEG bargains below 1 and many folks consider a range of 1-2 to be “fair” valuation). Their margins are better than most of the big hosting-type companies like Savvis (SVVS) and Equinix (EQIX), but there’s not necessarily a reasonable direct comparison. I’ve been stodgier and written about what I consider the more conservative “cloud” picks for the Irregulars in the past, including a profile of CoreSite a while back, but I do not own any of the companies mentioned above personally.

So what do you think? Will the “Facebook effect” bring another shot in the arm for tech companies, and drive the shares of Rackspace up further? Let us know with a comment below.


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Mitch R. Confesor
Mitch R. Confesor

yeah. Rackspace could be it. i had been thinking that it was Google. i'm also guessing that Pacesetter #3 would be chip giant Intel, but i'm really dying to know the name of this Israeli anti-cybercrime as Pacesetter #2.

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The Oxford Club has a very impressive track record when it comes to the tech stocks they pick (and they have several at the moment). I don't have my list at hand right now but I did draw one up just a short while ago and they were all doing really, really well. That's not to say of course that they hit it out of the park on each pick but if you were 50/50% on this one then maybe their past performance could tip it for you. For the record, I'm an Oxford Club member and quite happy with… Read More »

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