Ride the Cloud Higher With These 3 Stocks

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

In the tech world, everyone seems to be talking about “the cloud.” Everything from individual, home desktops to business applications are moving to the cloud. The clear and steady trend over the last ten years shows traditional software models becoming all but obsolete.

Cloud based applications are becoming an easier, more cost-effective way to operate, store your data, customize your applications, and make your network more secure. Businesses are running some key function applications in the cloud, such as customer relationship management (CRM), HR, and accounting.

The latest innovations in cloud computing are making our business applications even more mobile and collaborative. But what exactly does it entail? And how can it impact stock performance and decisions? With cloud computing becoming a mainstream enterprise technology, I believe investors should pay attention to companies that are making the transition right, such as EMC (NYSE: EMC), Salesforce.com (NYSE: CRM) and Rackspace (NYSE: RAX).

The first thing an investor must know is that there are different types of cloud technology available. "Private" clouds run at a company’s own site(s) and, as they are primarily used to provide company-wide accounting or HR services across multiple locations, most companies set this up themselves or contract out to other companies to set up this network. "Public" clouds, where customers access services like storage and server power from third-party companies, are the most common form of cloud technology, and where the investor should be looking.

IDC, a tech research firm, estimates that revenue from public cloud services exceeded $30.5 billion in 2011 and will grow to a staggering $72.9 billion in 2015. This growth is approximately four times faster than the IT market as a whole. Another source, Gartner's recently published Gartner Hype Cycle for Cloud Computing, 2012, estimates that the cloud business performance management market will grow 25% year over year.

And that is where investors can ride the cloud wave.

While big-name players such as Amazon (AMZN), Google (GOOG), and VMware are the heavy hitters when it comes to the cloud computing market, a great many smaller businesses and early stage startups are looking to stake their claim as well.

Some companies have succeeded in this simply by providing storage space. In cloud computing, when a business wants additional server space, it can set up a new virtual machine. By simply going to any virtual machine or network provider and clicking a few buttons, a business can have an additional server to use without actually purchasing one. It is the same with storage, which can be scaled based on demand.

Rackspace is one example. It hosts other companies such as Kraft Foods (KFT) and Vodafone (VOD). Competitor Salesforce.com provides services for HP (HPQ) and Time Warner Cable (TWC). Both companies are seeing tremendous growth simply by offering space and storage for larger companies that find it more cost effective to buy space instead of machines.

Smaller companies are being particularly aggressive with this strategy. With a hefty startup, these companies can buy the machines and rent out the space, similar to someone buying an apartment building and renting out the units. It is a steady stream of income for a one-time investment.

Other companies are using a different strategy. By helping customers ease their transition to the cloud, they focus on service rather than just product. Those that can facilitate easy and user-friendly navigation of the cloud, as well as provide virtual networking and storage will get lots of attention.

EMC has the main focus of optimizing other companies software to be accessed anywhere, such as on mobile devices. With a strong partnership with Microsoft (MSFT), EMC operates with the knowledge that the workforce of the future will rely even more heavily on mobile devices. However, for many workers, the most popular applications they use at their jobs are not optimized to work on mobile devices. Thus, the company specializes in optimizing applications such as Microsoft Office for use on phones and tablets across a range of mobile operating systems, including iOS and Android, all using a cloud-based service.

It goes without saying that Apple’s (AAPL) iPad is the leader in tablet technology. Employees looking to work remotely or even access email on their iPads are often met with frustration as software was incompatible. EMC works to both host the application, as well as improve the user interface on mobile devices and tablets. On the back end, it borrows from another cloud tech company by using Google Drive.

Launching applications in the cloud is often a painful and cumbersome process. Companies that allow for differentiating features of an application and even applications written in different languages/codes to be centrally managed, provide a unique and much-needed service to businesses and individual users alike.

One such company is Youincycle. This company provides a platform where software and application developers can collaborate on projects, store their data, and host the application for others to use all in one place. This is an example of ‘Platform as a Service’ (PaaS) – a company which provides the space for others to use and share. Youincycle is unique in that it also provides ‘Software as a Service’ (SaaS) of the same technology. A company is able to purchase the ‘platform’ and host it on its own server.

The future of cloud computing is extremely bullish. These models are easy wins for the investor. A company that focuses on providing cost-effective space and storage to other companies, such as Rackspace, is definitely secure, while a company that focuses on the service model, such as Salesforce.com, could be set for explosive growth in the next few years.

StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of EMC and has the following options: long JAN 2013 $50.00 puts on Salesforce.com, long JAN 2013 $50.00 puts on Salesforce.com, short JAN 2013 $50.00 calls on Salesforce.com, and short JAN 2013 $50.00 calls on Salesforce.com. Motley Fool newsletter services recommend Salesforce.com and Rackspace Hosting. 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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