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.

Software Plays
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.

Related Articles
  1. Term

    Why You Should Consider Investing In the Tech Industry

    The technology industry offers huge investment opportunities.
  2. Term

    Understanding Total Returns

    Total return measures the rate of return earned from an investment over a period of time.
  3. Investing Basics

    A Primer On Investing In The Tech Industry

    The tech sector can provide fantastic returns for investors with a little know-how in the field.
  4. Mutual Funds & ETFs

    Top 5 Precious Metals Mutual Funds

    Obtain information and analysis of some of the top-rated and most popular mutual funds that offer investors exposure to the precious metals industry.
  5. Investing

    Why Are Startups Going International?

    Expansion into international markets, if it occurs, is the final stage of a startup's evolution. Lately, though, the opposite has been happening; international expansion now occurs fairly early ...
  6. Technical Indicators

    Use Market Volume Data to Determine a Bottom

    Market bottoms often carve out classic volume patterns that let observant traders make fast and accurate calls.
  7. Investing

    Sergey Brin Biography

    Sergey Brin is an American computer scientist and businessman, who, with Larry Page, co-founded Google, which is among the most profitable internet companies in the world.
  8. Fundamental Analysis

    Calculating Return on Net Assets

    Return on net assets measures a company’s financial performance.
  9. Investing

    The European Effect on Google's Bottom Line

    The EU is turning up the heat on Google. What effect will it have on the company's bottom line?
  10. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
RELATED TERMS
  1. Derivative

    A security with a price that is dependent upon or derived from ...
  2. Real Estate Investment Trust - ...

    A REIT is a type of security that invests in real estate through ...
  3. Ginnie Mae Pass Through

    A type of investment issued by the Government National Mortgage ...
  4. Agency Swap Program

    A form of securitization whereby single-family residential mortgages ...
  5. Accelerated Return Note (ARN)

    A short- to medium-term debt instrument that offers a potentially ...
  6. Google Blogger

    Google Blogger is a free publishing platform run by Google (GOOGL). ...
RELATED FAQS
  1. Where do penny stocks trade?

    Generally, penny stocks are traded through the use of the Over the Counter Bulletin Board (OTCBB) and through pink sheets. ... Read Full Answer >>
  2. Where can I buy penny stocks?

    Some penny stocks, those using the definition of trading for less than $5 per share, are traded on regular exchanges such ... Read Full Answer >>
  3. How are American Depository Receipts (ADRs) priced?

    The price of an American depositary receipt (ADR) is determined by the bank or other financial institution that issues it. ... Read Full Answer >>
  4. How are American Depository Receipts (ADRs) exchanged?

    American depositary receipts (ADRs) are bought and sold on regular U.S. stock exchanges, either in the over-the-counter market ... Read Full Answer >>
  5. What are the main risks associated with trading derivatives?

    The primary risks associated with trading derivatives are market, counterparty, liquidity and interconnection risks. Derivatives ... Read Full Answer >>
  6. What are the top high yield bond ETFs?

    Three of the most popular high-yield bond exchange-traded funds, or ETFs, are the Peritus High Yield ETF (HYLD), the SPDR ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!