The evolution of cloud computing is creating a paradigm shift in the way companies will do business going forward. I see no stopping it as companies realize the significant cost savings and scalability of the service. Cloud computing is changing the way we think about technology. The Cloud is a computing archetype whereby web-based software, middleware and computing resources are provided on demand to companies. Cloud services allow companies to reduce technology costs through efficient and effective use of resources. Furthermore, with expensive upgrade cycles gone, the company is able to take advantage of the latest software and infrastructure without incurring capital expenditures. The new Cloud paradigm is creating significant opportunities regarding next-gen data center servers, Cloud internet infrastructure security and the storage and manipulation of the incredible amounts of data being created and transmitted. In the following sections I will detail five companies I posit stand to gain significant market share from the cloud's secular growth story.
Cloud Data Center Server Chip Opportunity
I am long Micron (MU) for multiple reasons. I believe the stock is currently undervalued due to the fact the possible upside from the Cloud paradigm shift is not currently priced into the stock. Jefferies & Co. semiconductor analyst Sundeep Bajikar recently initiated coverage of Micron with a Buy rating and an $11 price target. Bajikar sees both NAND Flash memory chips and DRAM chips profiting from the build-out of cloud computing facilities and the subsequent adoption of solid-state drives, or SSDs.
Our analysis and checks indicate next-gen data centers are designed for a high degree of virtualization, a model that inherently benefits from higher server DRAM capacity. Things may be helped along, too, by the advent of new DRAM technology, so-called LR-DIMM, which when coupled with Intel's (INTC) "Romley" server microprocessor, introduced this month, could "lead to an increase in average DRAM capacity per server. Micron gets 35% of its DRAM revenue from servers. Bajikar sees Micron having additional benefits derived from supplying NAND, DRAM and "NOR" memory chips as well.
Additionally, Micron has had a recent positive competitive advantage catalyst occur. Elpida Memory Inc. recently sought protection at the Tokyo District Court according to a filing with Japan's finance ministry. The bankruptcy may usher in a new era of DRAM consolidation, and will likely energize Micron's fundamentals. It is a win-win situation for Micron.
Finally, Micron recently has outperformed the market after the DRAMeXchange noted DRAM prices have continued to rally in the second half of March. PC makers appear to be replenishing inventories and that prices are likely to keep rising in April. There has been bullish April options activity as well. I believe Micron is at an inflection point and may just be ready to make the move to $11 in April.
Cloud Network Infrastructure Security Opportunity
According to a recent Gartner report, less than 5 percent of corporate internet connections are secured using next generation firewalls (NGFW) that allow greater and more specific control over every aspect of a network. Cisco (CSCO) has the largest share in the network security market with around 30 percent followed by Israel's Check Point Software Technologies (CHKP). As companies gradually adopt Cloud computing solutions, more elaborate security features will be needed within firewalls.
Jeff Wilson, a security analyst at Infonetics stated:
The proliferation of smartphones, iPads, netbooks, and other mobile devices connected 24/7 to the Internet is driving companies to reassess how critical infrastructure in HQ, branch offices, remote offices, and data centers is protected from malware.
This is a significant opportunity for Cisco and Checkpoint. Both companies are well positioned to reap the rewards of the wide open opportunity. 95% of networks are currently at risk. This is a secular opportunity that I see as almost unlimited. It seems securing networks will be an unending game of catch-as-catch-can with the big security providers like Cisco and checkpoint fast on the heels of the hackers.
The Big Data Cloud Opportunity
IBM states every day, we create 2.5 quintillion bytes of data-so much that 90% of the data in the world today has been created in the last two years alone. This data comes from everywhere: from sensors used to gather climate information, posts to social media sites, digital pictures and videos posted online, transaction records of online purchases, and from cell phone GPS signals to name a few. This data is big data. The enormous quantity of data being transmitted and analyzed has brought about a colossal shift in the way business is done and created the industry known as Big Data.
Wikibon, the open source business and tech advisory shop, postulates that Big Data is a $5B industry in 2012 and that it will proliferate to over $53B by 2017. That is a tenfold growth opportunity in just 5 years. IBM had a 20% plus Big Data market share in 2011. I see them as the market leader in this industry.
Another interesting Big Data play might be HP (HPQ). HP recently agreed to purchase a Big Data player called Vertica. Vertica is a market leader in big data and may assist HP advance substantially in the big data market. HP did $550M big data business in 2011. HP has had a rough go of it as of late. They recently missed the street's estimates last quarter and the stock took a shellacking. This would be a speculative contrarian play in my book, nevertheless, the higher the risk the higher the reward.
The prospects are huge for the above non-traditional cloud computing plays. Cloud server, network security and Big Data opportunities are prevalent and mushrooming. This is a multi-year secular growth story of epic proportions. These companies could experience exponential growth over the coming years based on the cloud computing paradigm shift. If you expect to outperform the major market indices, I would suggest having some exposure to this industry.
Use this information as a starting point for your own due diligence and research methods before determining whether or not to buy or sell a security. If you choose to start a position in any stock, I suggest layering in a quarter at a time on a weekly basis to reduce risk and setting a 5% trailing stop loss order to minimize losses.
Disclosure: I am long MU.
Additional disclosure: I may purchases CSCO, HPQ, IBM and CHKP within the next 72 hours.