All You Need to Know to Profit from Cloud Computing
Today we’ll dig into one growth trend that has quickly evolved from an emerging technology to a part of everyday life.
This growth trend is among the most powerful in the world. In fact, it’s changing the world and powering massive growth in companies from all different sectors. It’s enabling a new generation of connected technologies, changing how people interact with each other, and how they access information online.
I’m talking about cloud computing.
This $100 billion market has a growth forecast of 65% gains over just the next five years, according to Forrester Research. That’s a growth trend you want to be invested in.
Now, I believe that a lot of very smart people still aren’t entirely sure what “the cloud” is. To be sure, it’s an extremely fuzzy, nondescript term. And it’s used in a million different contexts, which only adds to the potential confusion.
But be that as it may, you are probably tapping into the cloud every single day, in one way or another.
So it’s pretty important to understand what the cloud is all about. And of course, it’s critical to understand how the cloud affects stocks that you already own, and how it’s opening up new profit opportunities in companies you’re not yet aware of.
Let’s start with a simple example of how I harnessed the power of the cloud this morning to complete a very simple task. I own a second home in Vermont, and I wanted to check the temperature in the house to make sure the heat was working properly.
I was able to adjust the temperature a few degrees because I have a smart thermostat that’s made by Nest – now owned by Google (NASDAQ: GOOGL). The Nest thermostat connects to a home network, and allows you to adjust settings and check energy history from a smartphone app or computer.
Nest is an amazing device, and it only works because of the cloud. Without the cloud, there would be no Nest.
All the data that the device collects is stored on Nest’s cloud servers, which are managed and owned by Amazon (NASDAQ: AMZN) Web Services and Rackspace (NYSE: RAX).
You’re probably thinking right now that you too use the cloud every day, without even thinking about it. And you’re right. You do.
You use the cloud when you use social media such as Facebook (NASDAQ: FB), stream an online movie from Netflix (NASDAQ: NFLX) or check out pictures on Instagram.
It’s not a stretch to say that almost every time you’re on the Internet you’re probably relying on some form of cloud-enabled technology.
The cloud has become pervasive. It’s a cornerstone of the digital world and part of everyday life for most businesses and consumers. And as Internet connections and digital devices get faster and more powerful, reliance on the cloud is only going to grow.
In fact, industry analysts expect IT departments will increase spending on cloud computing by 42% in 2015 alone. The only other comparable tech category is security, which is expected to see a 46% increase in spending in 2015. (Of course, a lot of that security spending will be done to provide more secure cloud-computing connections.)
All that said, it’s still a fuzzy term, right? So let’s define “the cloud,” because it is about as nebulous a metaphor as has ever existed.
Cloud computing is simply a term to describe a business model that offers on-demand network access.
The cloud offers fast, flexible and secure access for users, so long as they have an Internet connection. It can do so because of a massive shared infrastructure base, which consists of very large data centers, with thousands of servers, spread around the globe.
The main benefits of the cloud are that it offers low-cost computing power, loads of storage and tremendous flexibility (both in terms of access as well as software development).
It also allows consumers and business users to only pay for what they consume. And this has been one of the key selling points for businesses that develop cloud-enabled technologies.
A perfect example here is provided by Microsoft’s (NASDAQ: MSFT) Office 365. It’s the cloud-based version of the most widely used productivity suite in the world. And it costs just $6.99 per month for an individual subscription (versus $139.99 for the desktop version).
You can turn Office 365 on or off at will because it is a cloud-based subscription service. And you can install it on computers, mobile devices and smartphones, from which you can access files that you’ve stored on Microsoft’s cloud servers.
Office 365 is one of the reasons I’ve been loading up on Microsoft stock. The company represents a very easy way to gain some cloud exposure, in a relatively conservative investment.
As you’ve likely surmised, you’re probably already invested in the cloud if you own shares of the companies I’ve already mentioned. Microsoft, Facebook, Google and Amazon all offer varying degrees of exposure to the cloud.
But there are a lot of other ways investors can gain exposure, too.
How Can You Invest?
By far the easiest and most diversified approach is with an ETF that was launched in July 2011 by First Trust. The aptly named Cloud Computing Index Fund (NYSE: SKYY) holds around 40 positions, mainly from the hardware and storage, applications, software and communications equipment industries.
The ETF has outperformed the broad market over the past two years. Its 45% increase easily outpaced the 33% gain for the S&P 500. Looking forward, the SKYY ETF is a great way to easily diversify your portfolio with exposure to cloud-related investments.
To get more specialized exposure you can drill down into the ETF to find companies in specific industries. For example, you can buy into companies that make hardware and storage, such as EMC (NYSE: EMC) and NetApp (NASDAQ: NTAP).
Or you can zero in on my favorite types of investment opportunities, the user-facing software and application developers. These include companies such as Microsoft and Adobe (NASDAQ: ADBE).
There is also a massive (and growing) list of cloud-related companies that aren’t listed among the 40 holdings in the SKYY ETF. That’s simply because use of cloud-based technologies is growing so quickly that there are literally hundreds of ways to play the trend.
The most popular consumer-oriented apps that run on cloud-enabled technology provide a good list of viable options to consider in the large-cap asset class. These include Facebook, Twitter (NYSE: TWTR) and LinkedIn (NYSE: LNKD). And also keep an eye on Dropbox and Pinterest, which could IPO in the months ahead.
In the business world, a few of the most popular cloud services include Cisco’s (NASDAQ: CSCO) WebEx, Microsoft’s Office 365, Amazon Web Services and SalesForce.com (NYSE:CRM). SalesForce is the poster child for cloud-investing success, given its 225% gain over the last five years. All of these companies are worth a look for broad-based cloud exposure.
Beyond these options, there are a number of smaller, off-the-beaten-path pure-play options that I recommend buying. In fact, these are the types of companies that offer the greatest upside potential for long-term investors that seek big profits.
One of My Favorite “Pure-Play” Cloud Computing Stocks
One of these pure-play companies is Tyler Technologies (NYSE: TYL) (while I share my first name with the company, I have no relationship with Tyler Tech!). The company is much smaller than SalesForce.com and all the large-cap companies in the cloud space that I discussed earlier.
But with a $4 billion market cap, this is hardly a Silicon Valley startup. It’s established, growing steadily and delivering significant returns to shareholders.
Tyler Tech supplies information technology for public institutions, most notably local and state governments, schools, courts, cities and counties.
When the recession hit, local governments had little money. Tax revenues dried up, but expenses didn’t. That meant they had to cut back on spending. Now, tax revenues are rising and public institutions are once again working to improve the way they do business.
Much of that improvement comes from adopting new cloud-based technologies that are more efficient and cost effective than the old way of doing business.
So state and federal agencies, as well as the federal government, have been moving operations to the cloud over the last five years. That trend is helping Tyler Tech in a big way.
Over the last couple of years, Tyler Tech has risen by 107%, crushing the performance of the S&P 500 and the SKYY ETF. And over the last five years it has even crushed SalesForce.com, rising by 560% as compared to a 225% gain in SalesForce.com.
I wasn’t even that early to jump on Tyler Tech, but my subscribers are still doing quite well. I first recommended Tyler Tech in April 2014, and shares have jumped over 50% in the last year.
Looking toward the future, I expect that 20% to 30% annual returns over the next two years are possible. That share price appreciation will be fueled by the company’s revenue and EPS growth of 15% to 20% per year and an ongoing share repurchase program.
With the inflection point in cloud-service adoption now behind us, you need to have exposure to the trend. Go with the SKYY ETF if you like a one-stop-shop approach. It’s an easy investment to make, and will give your portfolio diversified exposure to the cloud opportunity.
If you prefer to invest in a single stock, you can consider large-cap names such as Microsoft and Google. These provide for partial exposure and are relatively conservative growth investments.
And if you’re looking for big profits, take the less traveled path. I recommend investing in lesser-known pure-play options, like Tyler Tech. It’s these smaller companies that can see explosive growth and soaring share prices.
Tyler Tech is one of the top growth stock recommendations in my Game Changers investment newsletter. With Game Changers, I uncover little-known stocks with huge profit potential. I’d love to have you test drive the service, 100% risk-free, today. Just click here now to check it out.
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