Just like eight-track players, VCRs and Atari 2600s, your computer's hard drive could be meeting its tech-maker in the sky. As more companies and consumers use the web to store videos, music, photos and other data, individual hard drives could become a thing of the past. This trend of "cloud computing" or web-based services that store your digital files and remotely offer access through an internet browser or downloadable applications is growing rapidly. Microsoft (Nasdaq:MSFT) estimates that, within a year, more than 90% of its software and products will be based on cloud-related products and services. This tectonic shift in the way we think about computing will have portfolio implications as well. While the trend is still in its early stages, the long term thesis is good.
ARTICLE:The Basics Of REIT Taxation

A Head in the Clouds
Anybody who has ever used Gmail or uploaded photos to SnapFish or Flickr has used cloud computing. As retail consumers adopt smartphones and use apps for everything from music-sharing to finances, as with Intuit's (NASDAQ:INTU) new Mint service, cloud computing will continue to grow. Coming out of one of the worst recessions in history, the corporate sector has place more emphasis on cost controls. Offsite cloud-based services are an easy way to facilitate cost savings while still increasing productivity. Its expansion will continue further as faster broadband and 3G & 4G wireless technologies are adopted.

For investors, the sector offers many opportunities. Companies like Rackspace Hosting (NYSE:RAX) or funds like PowerShares Dynamic Networking (NYSE:PXQ) have surged on the promise of the technology. However, all that video streaming, social networking, digitized health records and financial information is causing another issue: Storing that data. It's in that data storage that investors may find the best way to play the growth cloud computing. According to Tier 1 Research, demand for data center space will increase nearly 14% this year and 16% in 2011. However, the supply of storage is estimated to only increase by just 6% and 7%, respectively. This supply and demand imbalance will lead to higher profits for companies who own and lease data centers.

Analysts at Jeffries estimate that utilization rates for Datacenter REITs will rise well above their current rate of 80%. This will have an effect on rents similar to lower vacancy rates for apartment buildings. Funds From Operations (FFO) for Data REITs are expected to grow by 46% per annum through 2012. This dwarfs the FFO growth estimations for shopping centers (3.7%) and for apartments (12.3%). On top this, Datacenter REITs trade for an average 14.5 times FFO versus nearly 17 for the broad REIT measures like the iShares Dow Jones US Real Estate (NYSE:IYR).

Investing in Software as Service Centers
With cloud computing still in its early growth stages, there is potential for just as many losers as there are winners. Investors wanting to lay a wager on the growth of the sector, but who prefer a safer play, may want to bet on the datacenter owners. Here are a few picks.

Digital Realty Trust (NYSE:DLR) is the world's largest wholesale data center provider and operates more than 95 different centers across North America, Europe and Asia. As the only server-farm REIT with an investment grade rating from all three major reporting agencies, Digital Realty has managed to grow its FFO by 21% annually since its inception. Shares of the REIT are currently trading well below their 52 week highs and yield a treasury beating 4.9%.

Smaller REIT DuPont Fabros Technology (NYSE:DFT) currently yields only 2%, but analysts expect the company to more than double its dividend by 2012. Partnering with companies like Yahoo (NASDAQ:YHOO), DuPont Fabros operates eight different datacenters across the U.S and is currently constructing two more.

Finally, after going public about a year ago, CoreSite Realty Corporation (NYSE:COR) has added nearly two million square feet of data center space across the United States and nearly 600 customers to its mix. In the last quarter, CoreSite realized an 18.6% increase in rental rates on renewals. This should help boost and grow its dividend over time. Shares of the REIT currently yield 3.3%.

Bottom Line
Analysts predict that cloud computing could be the one of biggest innovations in the tech sector since the birth of the PC. As internet traffic is set to triple by 2014 to 64 exabytees per month, the datacenter REITs are poised to be a backdoor player in the growth of cloud computing. Investor's looking for both growth and dividend, should give the sector a look. (To learn more about REITS, see What Are REITs?)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: iShares Agency Bond

    Find out about the iShares Agency Bond exchange-traded fund, and explore detailed analysis of the ETF that tracks U.S. government agency securities.
  2. Mutual Funds & ETFs

    ETF Analysis: Guggenheim BulletShrs 2018 HY CorpBd

    Find out about the Guggenheim BulletShares 2018 High Yield Corporate Bond ETF, and get information about this ETF that focuses on high-yield corporate bonds.
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares DWA SmallCap Momentum

    Find out about the PowerShares DWA SmallCap Momentum Portfolio ETF, and explore detailed analysis the fund's characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: WisdomTree Bloomberg US Dllr Bullish

    Explore an analysis of information on the WisdomTree Bloomberg U.S. Dollar Bullish Fund, a currency ETF that tracks the overall performance of the U.S. dollar.
  5. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  7. Mutual Funds & ETFs

    ETF Analysis: Vanguard Total World Stock

    Learn about the Vanguard Total World Stock exchange-traded fund, which invests in stocks located in numerous countries with a high level of diversification.
  8. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  9. Mutual Funds & ETFs

    ETF Analysis: BioShares Biotechnology Products

    Learn more about the BioShares Biotechnology Products fund, an exchange-traded fund that is focused on producers of FDA-approved drugs.
  10. Mutual Funds & ETFs

    ETF Analysis: SPDR EURO STOXX 50

    Learn about FEZ, the Euro Stoxx 50 ETF. FEZ tracks the 50 largest companies in Europe, making it the Dow Jones Industrial Average of Europe.
RELATED TERMS
  1. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  2. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  3. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  4. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  5. Lion economies

    A nickname given to Africa's growing economies.
  6. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
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!