One of the latest buzzwords among corporations these days is “cloud computing,” a centralized method of using hardware and software over the internet which should lead to time and cost efficiencies. The highly publicized rework and rebranding of Apple’s (NASDAQ:AAPL) consumer cloud services as iCloud, along with recent offerings from Google (NASDAQ:GOOG) and Amazon (NASDAQ:AMZN), has caught the attention of the general public as well. It’s clear that cloud computing services are in demand by consumers and enterprises and the companies currently in the market have huge growth opportunities.
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Cloud computing as an industry has been in development for quite a few years, with numerous startups and established players involved at every level. Behind the interfaces used by gadgets and workers are companies providing storage and network hardware, virtualization infrastructure services, application platform services, and centrally maintained software. Though some companies have products offer a complete solution, there are still distinct areas of competition to examine.
At the most basic layer, companies have to supply the physical storage and IP networking hardware to support cloud data. Here, traditional server juggernaut Cisco Systems (NASDAQ:CSCO) really shines with its focus on providing routing hardware that serves as a backbone for the internet as well as private networks. Cisco faces stiff competition from other giants in Hewlett-Packard (NYSE:HPQ) and IBM (NYSE:IBM), who sell complete server systems and additionally can provide packages of ready-to-go cloud services integrated with their hardware. To address this, Cisco has established partnerships with EMC (NYSE:EMC) and VMware (NYSE:VMW) that also provide customers with complete cloud computing solutions.
Cisco stock is getting more attractive now that it’s started offering a dividend of $0.24, which at the current price of $15.10 translates into a nice 1.6% yield. The stock price has taken a beating lately on worries about the direction of the company, but operating cash flow and earnings growth have remained strong at $10.49bil and 9.96% respectively. With demand for data only set to increase in the coming year, Cisco has a lot of potential as an undervalued competitor.
One of the core ideas behind cloud computing is that a business will not have to worry about buying and maintaining server hardware, only on creating compelling software or services. By building a business on top on Infrastructure-as-a-Service (I aaS), companies can quickly and easily scale computing power to exactly what they need at the moment. One of the hot names in IaaS is Rackspace Hosting (NYSE:RAX), a Texas startup that has made a name for itself in the last decade, competing head-on with the likes of Amazon.com (NASDAQ:AMZN) and its cloud-hosting services. Rackspace is known for providing “fanatical” customer support to constantly communicate with clients, going as far as delivering late-night pizzas and Happy Birthday songs. This distinct competitive advantage has resulted in an incredible 35% growth in earnings per year for the last five years, and analysts expect this trend to continue. As cloud computing takes off – the industry has an average projected growth rate of 20% – Rackspace is well positioned to take advantage of the momentum.
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For companies that don’t want to spend the resources to build applications from scratch, there is also Platform-as-a-Service which provides basic software frameworks in the cloud. In this field, software giant Microsoft (NASDAQ:MSFT) is preparing to take on a dominant role as demonstrated by its commercials espousing “To the cloud!” and by its increasing number of enterprise-oriented offerings. In fact, Apple (NASDAQ:AAPL) used the Windows Azure cloud platform to build its shiny new iCloud service. Though Microsoft certainly has its problems with the decline in PC sales, the lukewarm reception of its smartphones, and the overall inefficacy of CEO Steve Ballmer, competitive products like Azure and Office 365 are a bright spot.
Content Delivery Networks
Another piece in the cloud computing ecosystem, Content Delivery Networks (CDN) have actually been around for a while, and the many-to-one model they follow does not fit into the strict definition of a cloud. Companies like Limelight Networks (NASDAQ:LLNW) and Level 3 Communications (NASDAQ:LVLT) mirror web content so that end users will have optimal bandwidth and at least some level of access during emergencies. Going forward, CDNs will also have roles like Akamai Technologies (NASDAQ:AKAM), which powers the content delivery system for iCloud. Akamai is currently trading at a deflated $29.15 per share, just above its 52-week low of $28.69, but its deal with Apple could become even more lucrative if iCloud begins delivering video as expected by industry observers. Based on this, Akamai could soon see earnings growth above the 17.25% annualized rate predicted by analysts. As cloud services become more bandwidth intensive due to high quality media, CDNs will become more in demand as a way to ensure content is always easily accessible regardless of location.