Cloud Computing, An Investor’s Perspective
Posted on: September 8, 2008 - Email Article - Printable Version
Cloud computing seems to be the buzz word in IT these days as companies are looking for the next big thing in computing. The IT folks at the leading companies are working hard to roll out these “clouds.” This emerging technology is gaining attention from major research institutions including Carnegie Mellon University. Lets not forget the likes of Google [GOOG: 565.56, +0.36 (+0.06%)], IBM [IBM: 127.76, -0.91 (-0.71%)], and Microsoft [MSFT: 29.63, +0.26 (+0.89%)] who are amongst a large group of corporations investing time and money to mature this unique idea.
What is Cloud Computing?
Cloud computing is an idea that has been around for quite a while. It is the concept of spreading computing processes over several resources through a network. Servers and computers are not always utilized and tend to be inactive. The typical data center houses hundreds of servers where many will sit idle as neighboring servers take the brunt of the workload. The likes of Google, Microsoft, IBM [IBM: 127.76, -0.91 (-0.71%)], and HP [HPQ: 52.23, -0.12 (-0.23%)] utilize cloud computing in their operations.
IT professionals claim that cloud computing has already become prevalent with the rise of virtualization. Several IT companies have adopted cloud computing with the advent of online applications. A great example is GoogleApps, a free office applications suite very similar to Microsoft office. This type of application is refereed to as SaaS (Software as a Service) and has been touted by the likes of Information Week. Here users can create and manipulate various documents in real time using the resources of Google’s cloud. Cloud computing is providing people with the capability to access powerful computing resources from devices like cell phones, laptops, and smart phones. Cloud computing should revolutionize data processing and mobile computing even further. This is just an example of the power of clouds, but where can it take businesses and how can investors reap it’s benefits?
The Investor Connection
Investors should keep an eye on clouds not only because companies can start expanding their service offerings over the Internet, but also because clouds can help reduce costs. Cloud computing helps IT cut infrastructure costs while adding new features and services to grow core businesses. Clouds can help grow margins as costs are cut back but service offerings are expanded. Clouds are being used for office applications, application development, and also complex tasks like risk calculations. Often times, corporations will have technology sitting idle in a building, using up resources, clouds now can utilize the power of these machines and put it to use. This will help businesses cut technology spending (hardware wise) and invest in software to efficiently distribute the workload across networks to harness the previously wasted computing power.
So let us recap, why do investors care about clouds:
- Cuts infrastructure costs, which can lead to margin expansion
- A part of the green initiative in IT
- Unlock computing power for complex situations
Who Is Investing in Cloud Computing?
Although cloud computing has been around in a very crude form before, companies are stepping up to actively develop high end cloud networks to offer services to customers. There are several large IT firms who are taking part in this revolution including Google, Microsoft, IBM, Oracle, HP, Salesforce.com [CRM: 76.74, +0.05 (+0.07%)], Amazon [AMZN: 131.34, -0.45 (-0.34%)], and Yahoo! [YHOO: 16.50, +0.14 (+0.86%)]. Out of this elite group, Google and IBM hands down are positioned best to profit from the growth of cloud computing.
According to Bloomberg, IBM reported R&D costs at $1.6 million for the most recent quarter. I think it is safe to say that a substantial amount of the costs were devoted to further cloud related technology. Several computing processes rely on virtualization and resource sharing. In order to solidify clouds as a reliable force in data centers, IBM must develop the hardware and core software properly. Unveiling the Blue Cloud was a big step for the company as a it provides Web 2.0 services to corporations allowing networks to function like an Internet.
Google, another leader in the cloud computing space, is a direct customer of IBM’s hardware and software. Using IBM’s offerings, Google is strengthening its backend with investment in cloud 
technology. GoogleApps, is a great example of SaaS where the company has opened up it’s cloud to developers to author applications based on it’s infrastructure and even allows end users basic applications like spreadsheets, presentations, and word processing. CEO Eric Schmidt believes clouds are a core value to his company’s business and according to Information Week the company has spent over $2.0 billion on four data centers. Paired with IBM, Google seems to be the best software and service provider of clouds in the future.
It is important to stay on top of the trends in computing although they can often times be hard to understand. Google and IBM prove to be leaders in the software, services, and hardware aspects of this revolutionary idea. The global slowdown could affect these companies as they rely heavily on ad revenue (Google) and IBM who also relies heavily on international exposure. Just take my two cents and consider the developments in the field as the market continues to find a bottom and the bulls prepare to regain control next year.
- Santosh Sankar
Disclosure: The mutual fund the author is associated with is long MSFT and GOOG. The author’s family is long IBM.
The Following Stocks Were Mentioned In This Article: AMZN, CRM, GOOG, HPQ, IBM, MSFT, YHOO
Comments
This is an interesting post that covers a lot of ground (and buzzwords). However, I am not sure if it simplifies the discussion. One of the key points that I think gets left out is the distinction between on-demand applications (usually referred to as software-as-a-service (SaaS)) that end users take advantage of and platforms that developers build applications on (usually referred to as cloud computing platforms).
I would suggest that the massive adoption is taking place in SaaS services. These are end-user consumable applications like Google Apps (that you refer to) and Salesforce.com. SaaS is being widely used today because someone else has built the application for you and allowed you to sign up and take advantage of it. In particular, it has democratized software functionality that was historically only available to the largest organizations.
We recently published a blog post on the various forms of cloud computing with the purpose of simplifying the discussion via images and cutting through the confusion.
You can read it here: “ASPs are dead, long live the Cloud” https://community.paglo.com/blog_topic/index/110-the-asp-is-dead-long-live-the-cloud
Brian de Haaff
http://www.Paglo.com
I agree that massive SaaS adoption is occuring with the likes of GE and P&G joining consumers in the adoption of end-user products like GoogleApps. As the cloud stabilizes I expect to see more application development, an example is Google’s cloud that has seen high down time but shows promise for Python developers. I like the visuals that chart out the cloud concept.
Santosh Sankars last blog post..Wal-Mart: The Best Play in This Market
I was surprised you did not include comments about Amazon’s Elastic Computing Cloud (EC2). Uptake has been phenomenal. It’s much more flexible than Google’s current offerings. It’s a true pure play on cloud computing and storage. While it’s early days, should it work, Amazon would become a major player in the cloud computing space.
Alex, thank you for the comment. I did look at Amazon’s progress in the cloud computing area, but I did not like them on a valuation basis. I personally believe that they will be a top 3 player once cloud computing matures further. Currently, I would not hold Amazon due to a high correlation with consumer spending. Amazon will be an interesting company to track since it looks like they are seeking to diversify revenues with new services and offerings such as the EC2.