Investing in Cloud Computing Companies

[Editor’s Note: I’d like to introduce our readers to one of our new writers, Gary Spivak. Gary has almost 20 years of I.T. experience along with about 15 more as a tech and software analyst for a handful of Wall Street firms. He also holds a programming degree from NYU and an MBA from Columbia Univerity. Needless to say, he knows what he’s talking about when it comes to investing in the technology and computing sectors.

But Gary was tired of all his top research going to fatten the pockets of wealthy institutional investors, so he’s decided to share his expertise with individual investors like us. I hope you enjoy his insight.]

When I started in IT in the mid 1980’s, all computer applications ran on the mainframe – a large computer that was efficient and well-managed.

I recall  watching “in horror” in the late 1980’s and early 1990’s as individual departments began to embrace “client-server” computing, where a “server”, which was equivalent to a large PC, began to run critical applications.

There were some benefits – better, graphical user interfaces and greater control – but distributing the computing power to hundreds of locations was destined to be a maintenance nightmare.

As individual devices became more powerful, the computing power got pushed further down to the end-user – PC’s, laptops and now smartphones and tablets.

But put everyone on the same network and it seems destined that the pendulum would have swung back to the centralized environment.

From the perspective of a former IT guy with plenty of gray hair, cloud computing is a natural progression…

What Cloud Computing Really Means

Cloud computing is simply any technology service, such as an application, infrastructure or platform that is offered to customers over the internet.

With the proliferation of devices connected to the internet, why not keep key resources in a centralized location? This centralization allows everyone to use the “public utility” called the internet to access these resources.  There are certain benefits to centralized resources – such as cost efficiencies and a better customer experience.

But what does that mean to me?

The typical Internet-savvy consumer has been using services in the cloud for years.  If you’ve ever bought anything from Amazon.com, you used your browser and the Internet to get on that site and order your goods.  That was a transaction occurring in the cloud.

So, it is easy to see how consumer-facing businesses have already adopted cloud computing for their own purposes.

But what is now changing is a migration of business-to-business (B2B) transactions also occurring in the cloud.  Also, greater trust in the cloud leads to more activity.

The question is – if a company sells products over the cloud, are they a cloud company?  The answer is, in this writer’s opinion, no.

When a mining company loaded coal onto a railroad car, were they a railroad company? No!  When PETS.COM – now part of Petsmart (Nasdaq: PETM) – began selling pet supplies over the Internet, were they an Internet company?  No!  They were a pet supply company.

Finding the “Arms Suppliers”

Investors typically want to find the winner in “the war”.  Will Amazon (Nasdaq: AMZN) sell more books over the internet than Barnes & Noble  (NYSE: BKS) ?  If yes, then Amazon is the winner, right?

The smarter investor will look to the “arms suppliers” in “the war”.  Don’t pick a side in the war, pick companies that sell services to all of the war’s participants.

And THIS is what makes cloud computing so interesting.  There are many different levels of “arms suppliers” in these wars.

What are some of the weapons required?

• Centralized data centers – the cloud is perfect for the re-centralization of IT resources.  Companies like Rackspace (NYSE: RAX), Amazon Web Services, Equinix (Nasdaq: EQIX), OpSource and SunGuard.  Others include DELL (Nasdaq: DELL), Hewlett-Packard (NYSE: HPQ), Cisco (Nasdaq: CSCO), Verizon (NYSE: VZ) and AT&T (NYSE: T).

• Storage – The files you have on your computer are moving to the cloud.  Storage, once unthinkable to be moved to the cloud (people want their data near them) is now significantly being used in the cloud.  Vendors like Apple (Nasdaq: AAPL) , Dropbox, Mozy (owned by EMC, NYSE: EMC) and Riverbed Technologies (Nasdaq: RVBD) facilitate cloud-based storage solutions.

• Security – Security remains a concern when accessing resources through the Internet.  Many companies boast of cloud security solutions.  Among them are Qualys, Trend Micro (Nasdaq: TMIC), Webroot and Websense (Nasdaq: WBSN).

• Applications – Perhaps the best-known services delivered via the cloud are applications, or Software-as-a-Service (SaaS).  Among the best known in this category are Salesforce.com (NYSE: CRM), Taleo (Nasdaq: TLEO) and Keynote Systems (NYSE: KEYN).

• Virtualization Technology – Cloud-based solutions typically deploy some kind of application or desktop virtualization technology.  Vendors leading this charge include VMWare (NYSE: VMW) and Citrix (Nasdaq: CTXS).

Beware of companies that claim, “We are a cloud company.”  Look at what they offer and see if it takes advantage of this secular shift and is not just using the latest jargon to inflate its market capitalization.

Good Investing,

Gary Spivak

P.S. Of all the companies I’ve listed above, there’s one that I think has the best potential for investors looking to take advantage of the cloud. It benefits from a number of the trends listed above.

To find out which company is leading the charge in my opinion, click here.

Article by Investment U