Competition for the Cloud Heats Up

Phillip is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Cloud computer storage technology is anticipated to be a major development in the years ahead, and it is one that could pull International Business Machines (NYSE: IBM) out of the dirt and into the sky.

A buyers' market

IBM reported on June 4 that it is seeking to buy SoftLayer Technologies, which is the world's largest privately held web hosting company. The firm already has 25,000 clients, including AT&T and Citrix Systems. The acquisition would lead IBM to create a division specifically targeted at clients interested in cloud services. With many businesses looking to expedite their operations, cloud technology is what many need to ensure their information is stored in a location that can be accessed easily by many devices. Furthermore, as the global business community becomes more integrated, drawing people away from desks and into more mobile capacities, cloud tech can ensure the easy transfer of information.

The acquisition of SoftLayer shows that IBM is serious about its move into this area. IBM could make cloud computing its niche, as the firm hasn't managed to break into many of the other major computer markets, such as tablets, computers, and smartphones.

While many investors may assume IBM is the underdog, due to the firm's lack of recent performance, the company is actually able to compete with the big dogs. IBM spent $6.3 billion on research and development in 2012, and R&D is increasing slightly each year. That massive amount of spending is needed to get a product out to the market. While a huge amount is spent on R&D, the firm still managed a stellar 21% profit margin last year, and IBM has continued over the years to quietly rake in huge profits. I'm definitely considering buying this company in the next month or two because it appears to be on the verge of something big in cloud technology. Expect a major release in the next year or two that will put this company near the top of computer software development.

More competition is out there

IBM isn't the only company honing in on the cloud market. Amazon (NASDAQ: AMZN) and Microsoft (NASDAQ: MSFT) are also making plays, though they are doing it more organically. 

Amazon seems to be successful at whatever it attempts, which makes Amazon Elastic Compute Cloud (Amazon EC2) a potential breakthrough that could make the firm a top competitor in the cloud computing market. EC2 provides users with a re-sizable compute capacity in the cloud, making web-scale computing much simpler. Those who use the service are able to control their computing resources and run them on Amazon's cloud network. The device also decreases the amount of time needed to boot new server instances. As the user's computer requirements change, the technology can allow scaling both up and down. 

Amazon.com is a very speculative stock. Much of its activity is still in its infancy, as it attempts to break into a multitude of sectors. The release of Amazon Elastic Compute Cloud is a huge step for the firm, and the year ahead will show whether it catches on. The release also puts Amazon ahead of IBM if that firm doesn't close the SoftLayer deal, which would be a leapfrog move for IBM.

Much of Amazon's price is driven by the fact that it is a darling stock. People love Amazon and expect big things ahead -- but the company will need to deliver to justify its share price. The firm looks overvalued, as it has one of the highest price to book ratios in the retail sector at 14.8. That's an increase of 18% from last year. Hold back, but be ready to buy up the company if Amazon EC2 catches on, and especially if IBM balks at the SoftLayer purchase.

Microsoft pours billions into cloud research

Microsoft also wants in on the action. In 2011, the company spent almost all of its annual research and development budget on cloud computing, which was approximately $9.6 billion. The cloud-first strategy, which the firm will integrate with Windows Azure, aims to be an easier process than some of the previous cloud computing techniques, which were more difficult to operate, the company stated. Details about exactly how it will work haven't been released, but with so many people on the Microsoft Windows operating systems, I expect a full integration of the system with cloud computing. Already, the company reported its Azure business has helped create a cloud service reaching the $1-billion mark. 

Microsoft looks to be the leader right now in cloud computing with its Azure. The reported revenue is certainly an indication of that. What's more is that the firm has one of the highest returns on equity in the software and programming industry. In fact, the asset turnover is 60.3. Furthermore, the profit margin of over 21% is identical to IBM and shows tremendous strength in keeping expenses down. However, I have my doubts about management at the firm, due to the apparent user-unfriendliness of the company during the announcement of restrictions on the upcoming release of the Xbox One. Gamers are restricted to only give a game away once, and it has to be to a person who has been a friend for at least 30 days. The firm is also not performing well with the usability of Windows 8. Microsoft seems to be forgetting its most important asset - its customers - and that could hinder the appeal of Azure and any future cloud programs released by the company.

Market research

Two hundred IT professionals were surveyed recently with the software, CloudPassage, which found that about 80% of those who participated used cloud computing for at least one purpose, according to GDP Insider. By the end of this year, at least 70% of additional organizations are planning to use cloud services. All three companies have their claws firmly clasped to the concept of cloud, and all three look set to develop some type of revenue from the attempt. In other words, there may be more than one firm securing major profits. The question isn't whether there is big money to be made in cloud computing, but rather, which company's stock will hit the skies first? My money is with IBM if the company buys SoftLayer.

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Phillip Woolgar has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com, International Business Machines., and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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