Clouds are about saving.
In the end, a well-managed cloud will cost enterprises less to run than a server farm. There will be fewer employees needed to manage a single cluster than a host of applications. Server hardware will be consolidated.
And there will be less software. Even cloud software.
But there are profits on the way from here to there. Profits for the companies that make software for the cloud. Profits, in particular, for Red Hat (RHT) and VMWare (VMW), the two publicly-traded cloud leaders.
VMWare is best known for its vSphere "hypervisor," which virtualizes systems so that Windows programs can be run on Linux machines, or vice versa. The company has built a complete cloud product line around vSphere, and while it bows to open source, commitment to that product line brings you into an Oracle-like embrace. If you, the investor, are looking for regular revenue streams, this is a good thing.
Red Hat, which made its mark with its enterprise Linux, "bet the company" on its own cloud stack, marketed under the name Open Shift. Open Shift delivers a complete cloud platform. Combine it with Linux and you can start moving applications to the cloud quickly, or build new applications directly for the cloud.
Both VMWare and Red Hat are big cloud winners, and since both issues are relatively pure plays (VMWare is actually a unit of EMC, which owns 80% of it) they have been good ways to play the cloud. Since the start of 2009 VMW is up 255% in value, RHT slightly more, giving both PE multiples in the high 50s.
This, however, is the year when both have to justify past investor faith. It's a year for high growth and high profits. But given the way these things work - investors buy what's coming and not what is - both companies are fully valued.
VMWare is focusing on alliances for 2012, and scored a coup last week when co-founder Diane Greene was named to Google's board of directors. Greene was replaced at VMWare by Paul Maritz in 2008, but the connection could still prove valuable.
Red Hat's word for 2012 is ecosystem. It is recruiting other open source firms to its home town of Raleigh, NC, taking over an office tower from Progress Energy, and it will begin hosting events there. (Fortunately for frequent flyers these will usually have virtual links.)
The problem in both cases is that, as sales and profits ramp up, the future necessarily becomes a little less rosy than the present. The companies grow, but PE multiples compress, they move toward the mean. So if you've been in these stocks they're good holds, but if you're looking for big gains in 2012 look elsewhere.