Wall Street loves few things more than its next hot trend, catch phrase or big pitch. Cloud computing has the makings of all three, but is it for real and can you make money off it? First, our essential first task is defining just what cloud computing really is.
A Dime Version of a Definition
In its essence, cloud computing is the idea of taking all the heavy lifting involved in crunching and processing data away from the device you carry around, or sit and work at, and moving that work to huge computer clusters far away in cyberspace. The internet becomes the cloud and voila! – your data, work and applications are available from any device with which you can connect to the internet, anywhere in the world. (These technologies have changed the way their industries run. Find out more in 4 Industry-Changing Tech Trends.)
Cloud computing comes by other names you may have heard, such as "software as a service," or "on demand computing." It's not a single piece of technology, like a microchip or a cell phone. It's an idea, one that has been laying in wait for many years as certain technologies caught up.
One of the biggest impediments to cloud computing has been internet bandwidth - we needed the internet to be a super fast, rushing river, and just as fast wirelessly as in the wired home or office. We're finally getting there with widespread broadband adoptions, and with 3G & 4G wireless technology.
We've also had to wait for internet security standards and protocols to get solid enough to make CEOs feel safe exporting huge data clusters out of their buildings and into someone else's hands.
Cloud computing offers big businesses some serious cost saving potential. Instead of investing millions in huge server centers and intricate, global IT departments that require constant upgrades, the company can use "lite" versions of workstations with lightning fast internet connections, and the workers will interact with the "cloud" online to create presentations, spreadsheets and interact with company software.
Will It Be Dot-Bomb 2.0?
The memories of the dotcom crash are recent enough to still be fresh in most investors' minds. We were charmingly sold a bill of goods regarding a "paradigm shift," a "revolution" and a "game-changer" all rolled into one.
Since of course hindsight creates perfect vision, we can look back at some of the mistakes Wall Street made in elevating dotcom stocks to the stratosphere. Instead of using tried and true metrics of a company's worth - the P/Es, the dividends, the strength of the balance sheet - Wall Street invented new metrics like "web traffic growth," or made unrealistic suppositions, like that people would never shop in a grocery store or a mall again.
Luckily, investors that want to participate in the cloud computing trend can invest in some well-known companies that have real sales, earnings and stable businesses. And unlike most dotcom companies from last decade, cloud computing can offer real savings, right now. And today's sluggish economy, that's exactly what company leaders need to see before moving forward on any new initiatives.
Investing Tacks - The Hardware Plays
Companies like Google (Nasdaq:GOOG), IBM (NYSE:IBM), Intel (Nasdaq:INTC), Microsoft (Nasdaq:MSFT), Cisco (Nasdaq:CSCO) and Hewlett-Packard (NYSE:HPQ) are making huge investments in cloud computing. They are building out the seas of servers that will make cloud computing possible. Some, like Google and Microsoft, have their own applications to offer over the internet, while firms like IBM and HP are more interested in providing the backbone to large corporate customers.
There's also a realm of slightly smaller companies are working to upgrade the internet and the corporate IT center for cloud computing. VMware (NYSE:VMW) sells software to make computers work more efficiently, while Akamai (Nasdaq:AKAM) is hard at work making the internet's "pipes" more able to pump the huge amounts of data required to make cloud computing a reality.
This trend won't just be about hardware. Software also has to be changed for cloud computing to work. Instead of installing software on your computer or huge IT staffs updating in-house server farms, software will be maintained and delivered over the internet. Innovative companies like Salesforce.com (NYSE:CRM) and Concur Technologies (Nasdaq:CNQR) have taken popular applications like expense reporting, travel logistics, and contact management, and offered them completely over the internet.
You could even consider mobile internet devices as a good play on this trend. As devices like Research in Motion's (Nasdaq:RIMM) Blackberries or Apple's (Nasdaq:AAPL) iPhones and iPads offer more applications that customers can use for work or for play, they will make their way into many more hands this decade.
The Bottom Line
Smaller companies that are focused solely on cloud computing tend to be more expensive relative to how much money they're making today. As such, they are a little riskier, but if cloud computing really takes hold - and all signs point toward widespread adoption - these more focused plays could outperform larger companies just dipping their toes in the water.
But don't discount the potential positives that even a huge company like IBM or Microsoft could see. As large corporations start to crunch the numbers and see the potential savings of outsourcing parts of their IT divisions, some big orders could be coming the way of the tech sector's giants.
For my money, I'd say that cloud computing is more than a mere fad; it's a natural extension of what the internet was meant to be. Whether the process takes two years or 10 to take hold, it's hard to say, but investors with longer time horizons should try and participate.
Investing NewsSpace enthusiasts are in for an exciting time as Silicon Valley startups take on the lucrative but expensive final frontier.
Personal FinanceEven if you’re a finance or statistics expert, you’re not immune to common decision-making mistakes that can negatively impact your finances.
Mutual Funds & ETFsLearn about the differences between Vanguard's mutual fund and ETF products, and discover which may be more appropriate for investors.
Mutual Funds & ETFsLearn about some of the mutual funds in Vanguard's lineup that are popular among 401(k) investors, and find out why you should consider them.
Mutual Funds & ETFsLearn about reinvesting ETF dividends, including the benefits and drawbacks of dividend reinvestment plans (DRIPs) and manual reinvestment.
InvestingFacebook and Google have both released new cloud-based photo sharing services. How good are they?
Home & AutoIf you're just looking to get rich quick, you could end up in the poorhouse.
EntrepreneurshipFind out which factors you should weigh when searching for income-producing real estate.
Mutual Funds & ETFsDiscover the top Vanguard target-date retirement funds with target dates in 2020, 2030 and 2050, and learn about the characteristics of these funds.
Mutual Funds & ETFsDiscover the three Vanguard funds tracking the S&P 500 Index, and learn about the characteristics and historical statistics of these funds.
Hedge funds can trade penny stocks. In fact, hedge funds can trade in just about any type of security, including medium- ... Read Full Answer >>
The Vanguard mutual fund family is one of the largest and most well-recognized fund family in the financial industry. Its ... Read Full Answer >>
Mutual funds in India work in much the same way as mutual funds in the United States. Like their American counterparts, Indian ... Read Full Answer >>
Like most financial assets held by institutions such as banks and investment firms, UTMA accounts can be escheated by state ... Read Full Answer >>
While the specific dormancy and escheatment rules for stock accounts vary by state, all states provide for the escheatment ... Read Full Answer >>
Mutual fund investors have numerous items to consider when selecting a fund, including investment style, sector focus, operating ... Read Full Answer >>