Growth In Technology: Cloud Computing
Scanning the headlines, it’s easy to get discouraged. With stocks approaching 12-year lows, unemployment at 25-year highs, and a President warning of an impending Second Great Depression, it’s not hard to feel a little down. And yet, all is not lost. CNN/Money posted an encouraging article this weekend about six companies that began during tough economic times. From Proctor & Gamble (PG) to FedEx (FDX), these companies started off in a crisis, panic, or Depression, but ultimately persevered to success.
In that vein I offer a similar silver lining. As many companies struggle to remain profitable, some are still doing well. In fact, year-over-year growth continues for one such subsector that suffers from two market-driven biases. For one, it’s technology-based. Many investors still remember the tech crash of the early 2000s. With long-memories, investors are reluctant to take on large positions in technology. Second, the current economic environment skews investors’ outlook to the negative. Sure, growth is possible. But why bet the farm now?
Although I don’t recommend anyone take a second mortgage, I am encouraging you to consider an attractive area of technology: cloud computing. “Cloud” is a metaphor for the internet. And despite hiccups along the way, the internet is still a source of tremendous potential for many decades to come – hence the reason to consider investing in cloud technology.
More specifically, cloud computing encompasses both software-as-a-service (SaaS) and software-as-a-platform applications. It’s where companies buy subscriptions to external servers and software – hence saving the expense of in-house hardware and IT support. Many businesses are moving to such services as the cost of maintaining servers and staff rises. Cloud computing answers the old question: why buy technology that will be obsolete in a few years when you can rent and always be up-to-date?
One of the more successful SaaS applications has been Salesforce (CRM). Their cloud computing interface is Salesforce.com. Their customer relationship software allows businesses to manage customer interactions from an ordinary web browser. Basically, it’s an on-demand application for businesses who don’t want to buy and maintain expensive CRM-software.
As companies look to reduce initial outlay for servers and pare down payrolls, cloud computer services like Salesforce.com will become more compelling. According to research firm Gartner, in 2008 approximately 10% of software application spending by businesses worldwide was provided over the internet (the cloud), a major increase increased over the last decade. I expect this trend to continue for the long term.
Companies that provide these services and the infrastructure to carry them are becoming increasingly attractive. Vendors such as Citrix (CTXS), and VMware (VMW) provide the backbone for cloud computing services, as does a division of Amazon (AMZN). Other companies supply the user interface: Salesforce (CRM), Netsuite (N), and Google (GOOG). If any of these companies match up with your overall strategy, it might be a good time to consider an investment.