It's hard to believe, but our personal computers in their current form are going the way of the dodo. Both the rise of mobile commerce and social media are helping to ensure their fate. As more companies and consumers use the web to store videos, music, photos and other data, individual hard drives are becoming 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 - and this architectural and structural change could be one of best ways to play technology for the long term.
TUTORIAL: Stock Basics

A Long-Term Play
Many of us have been cloud computing users for years. Anyone who has "liked" a page on Facebook, uploaded a photo to Yahoo's (Nasdaq:YHOO) Flickr website or used Intuit's (Nasdaq:INTU) Mint service to manage their finances, has been a cloud computing user. At its core, cloud computing moves the heavy data processing away from an individual's computer and places it on a server farm. End users then access their data and programs via the internet. With the widespread implementation of broadband and 3G & 4G wireless technology, internet bandwidth has finally caught up to the necessary speeds at which on demand computing can take place. In addition, the adoption of mobile devices such as smartphones and tablet PCs has spurred the cloud to grow. (For related reading, see A Primer On Investing In The Tech Industry.)

That growth so far has been explosive. Worldwide cloud services reached $68.3 billion in 2010, a 16.6% increase over 2009. Analysts estimate that by 2012, the software-as-a-service market will grow at a 20%compound annual growth rate (CAGR) to reach nearly $21 billion. Similar results are expected for the platform-as-a-service and infrastructure-as-a-service markets, with 160% CAGR to $9 billion, and 60% CAGR to $4 billion, respectively. Within the next five years, enterprises will spend nearly $112 billion cumulatively on cloud computing.

Cloud computing also taps into another planet-wide issue: energy consumption. Thanks to massive investments in new data center technologies, clouds are able to achieve industry-leading rates of energy efficiency. Cloud computing could reduce energy usage in the global IT sector by 38% by 2020, and customers using NetSuite's (NYSE:N) Enterprise Resource Planning and Customer Relationship Management software services saved a combined $61 million in energy bills per year. Cloud computing can be seen as the next leap in "green IT" services. (For more, see What Does It Mean To Be Green?)

A Cloud Portfolio
Some analysts expect the cloud computing theme to take almost 30 years to fully develop. With such long-term potential, the sector is still in its early growth stages. For investors, a broad based fund like the Internet Architecture HOLDRs (NYSE:IAH) or the PowerShares Dynamic Networking (NYSE:PXQ) make sense as a way to play the theme. However, there are plenty of individual picks as well.

At its heart, cloud computing really comes down to storage. Data storage giant EMC (NYSE:EMC) recently reported a 24% earnings growth over the first quarter. Providing a variety of networked information storage systems and software, the company is poised to continue that growth as the cloud becomes more common place. In addition, EMC has another feather in its cap. The company owns an 80% stake in cloud operating-systems maker VMware (NYSE:VMW). Analysts expect VMware's earnings to triple over the next five years.

Personal computer maker, Hewlett-Packard (NYSE:HPQ) has continued to add new innovations to its cloud computing offerings, including its new Eco-POD data center. HP estimates that its Eco-POD uses 88% less space than a traditional data center, and uses about 95% less energy to run it. Trading near its 52-week low and only for a forward P/E about 7, HP may be one of few values currently in the tech space.

Cloud service stock (NYSE:CRM) has become the poster child for "software as service" companies. However, it's not the only fish in the sea. Both human resources cloud company Taleo (Nasdaq:TLEO) and customer service stock Rightnow Technologies (Nasdaq:RNOW) offer investors a chance to participate in service side of the cloud at much more reasonable valuations. (For related reading, see Equity Valuation In Good Times And Bad.)

The Bottom Line
The adoption of new faster wireless technologies, along with mobile devices, is spurring a major change in the way we use computers. Long-term, the shift towards cloud computing will be one of the biggest tech trends of all time. For investors, adding this theme could be one of the best ways to profit in the upcoming years. The previously listed stocks, along with funds like the iShares S&P North American Technology (NYSE:IGM), make excellent picks. (For more, see Introduction To Exchange-Traded Funds.)

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

Tickers in this Article: YHOO, INTU, N, IAH, PXQ, EMC, VMW, HPQ, CRM, TLEO, RNOW, IGM

comments powered by Disqus

Trading Center