Investing in Cloud Computing
Posted on: May 28, 2009 - Email Article - Printable Version
Cloud computing has been the buzz word the last couple years in IT, making many believe it is a fad. The vast majority of the investing population does not understand what cloud computing is, what it can do, and how it is changing the current framework of computing and the large corporate data centers that have become the nerve center of business. I want to shed some light on this computing model and offer some ideas for those looking to invest into this IT hotspot.
What is Cloud Computing?
The concept of cloud computing is nothing new and has been turned into the “cool” word amongst IT companies. This was evident late last year when Oracle [ORCL: 25.47, +0.26 (+1.03%)] CEO Larry Ellison, ridiculed this new fad that has swept IT investors, analysts and users worldwide. The idea of cloud computing has been in existence for years, but only recently has it received a name. Cloud computing is essentially a dynamic and ever improving set of resources that have been virtualized (or essentially the idea of sharing groups of resources amongst various applications) and delivered over the Internet. Now this may seem quite odd, doesn’t email technically fall in this category? Not quite… it all depends on how the resources have been set up. Let’s say that XYZ E-mail has a machine that has multiple operating systems installed and is running on what we call virtualization software. This virtualization software helps dynamically allocate resources between these various platforms which indirectly benefits you as your e-mail is able to be stored a retrieved faster. If they did not virtualize their machine it would not really be cloud computing. Now imagine this on a larger scale where a larger number of resources are pooled together and efficie
ntly used as software demands it, this is the power of cloud computing. Cloud computing reduces costs, driving down capital expenditures (capex) since hardware is no longer purchased but rented in a “utility” fashion. Existing machines can be used more efficiently where no one machine is overworked of underutilized. This simplistic idea is truly a great step in computing and will enable many innovations down the road.
Important Trends
Trends are extremely important in successful IT related investing. Technology evolves at a rapid pace and is full of false hopes, it is important to identify viable trends and position yourself accordingly. There are two trends that jive well with the concept of cloud computing, the first being the mobilization of information. This is a trend that was set in motion with the first laptops which were then followed by cell phones. Companies rapidly changed their offering during the last decade with the latest netbook releases as well as the newest smartphones like the Blackberry and iPhone. Infrastructure is also being revamped as consumers demand faster connections to stream media rich content as well as large amounts of important information over the Internet. Information is essentially available anywhere, but how do we remain productive even on our Blackberries? Simple, plug into the cloud where the power of servers can allow you to update your finances or amend that report for work through a simple computing device with a browser. The computing occurs remotely with the local client essentially just being an interface contrary to even just a decade ago when the local host required heavy computing power. The mobilization of information will be driven by cloud computing and has many benefits as companies are always looking to improve the productivity of their employees. Moving on to the next trend, cost benefits, something any manager is looking for especially during economic downturns.
The cost benefits of cloud computing are significant in my opinion, contrary to many reports including the recent McKinsey publication. Currently, companies are working the kinks out of the model, but once it is stable and more mature, companies can “rent” out computing power for cheap without worrying about setting up and maintaining large corporate data centers. All corporations will require are bare bone terminals that can connect to the “cloud” via the Internet to allow employees to use ERP and other tools that they normally wouldn’t. The benefit is that many ERP systems are already Internet based; making any further changes easy and quite doable. Such a shift must be seen as an investment where expensive capex is cut and a more stable opex is adopted. The Amazon EC2 cloud’s Window’s extra large high end CPU running windows only runs $1.20/hour, this shows how inexpensive such “utility” type computing can get. Mobilizing employees will also offer cost benefits as workers will be equipped at a low cost to remain productive even when they are out of the office. This could also translate to less office space by allowing people to work from home with the same software and stability that is experienced in the cubicle. As you can see, cloud computing has a lot to offer and will bring large scale change to Corporate America once it matures.
Some Interesting Plays
For the straight forward cloud computing pick, I am going with Amazon [AMZN: 131.34, -0.45 (-0.34%)], although a large online retailer and a proud component of the S&P 500 Discretionary composite, this company really understands cloud computing and offer it to businesses at affordable rates to keep costs low for businesses. Amazon has been the first to monetize cloud computing’s utility type offerings successfully. While the Microsoft rates are quite high, the powerful Linux offerings are very inexpensive coming in at just $0.80 for the souped up high demand, high end processing power. While this makes sense since Linux is open source while Microsoft is not, the cloud is said to operate extremely well according to reviews by InfoWorld and ComputerWorld. While this is not a large part of Amazon’s revenues, it is a great way to benefit immediately from the monetization of this IT trend. If you want information on Amazon’s core business, online retail, which has held up through the recession, check out this article that could be useful when conducting further research.
In virtualization, I like VMWare [VMW: 53.47, -0.56 (-1.04%)] who has really been clobbered during this recession. VMW is the leader in virtualization software which is a critical in the setup of systems that will be operating under the cloud. This piece of software is a thin layer between the hardware and operating systems. It is essential to have software similar to what VMW offers so resources can be shared and more importantly reallocated on demand as usage fluctuates. This will ensure the IT infrastructure is used to the best of its ability and that the end user is offered the best service possible. There has been much speculation that VMW could be an acquisition target, I am not concerned too much about this since VMW has established a strong position virtualization. The fundamentals are a bit unfavorable but I see VMW performing well over the next year or so.
Want to access your reports anywhere? That would require mobilization, where Sybase [SY: 47.10, +0.30 (+0.64%)] is the winner with its growing iAnywhere segment. Sybase has partnered with names like SAP AG [SAP: 47.39, +0.98 (+2.11%)] to offer ERP and CRM tools on mobile devices whether it be laptops or PDAs anywhere there is Internet. It also has a strong database and business intelligence business that will help it keep stable revenues as it works to grow out its emerging iAnywhere segment. A great play, imagine the day when you can access sophisticated corporate applications remotely on your phone so you can updated records and look up information in a secure and trouble free fashion. Sybase is working on all of this as it has its hand in setting up the secure centers and keeping abreast of the software to do exactly that. With little competition if any and the support of large vendors, Sybase should do quite well for its shareholders.
Cloud computing is a great thing that is still growing and yet to break out in full force. Like everything in investing, catch this trend while it is still young and make some profits on it. I will tell you that my Blackberry and it’s interaction with Google’s services make my life easier, just wait until similar software becomes a standard for consumers and businesses alike. This trend will surely change computing as we know it and you can say you profited from it with some smart investment choices.
- Santosh Sankar
Disclosure: The Fund the author is associated with has interests in SY.
The Following Stocks Were Mentioned In This Article: AMZN, ORCL, SAP, SY, VMW
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