Cloud Computing Stocks

Cloud Computing - A secular growth theme

A fundamental part of long term investing is finding secular growth stocks to invest in. These are stocks of companies that will grow regardless of the economic cycles. Often, these trends occur due to demographic changes, but another driver for secular trends is the introduction of new technologies or paradigms. One of these paradigms I find most compelling is the concept of Cloud Computing.

Long Term Growth of Cloud Computing at 20%
The long term secular growth of cloud computing is approximately 20% as firms reduce IT costs by deploying their applications into cloud servers for their own use and distribute software to clients through the cloud. Given this growth rate, a forward PE of 30 to 40 (1.5 to 2.0 times its growth of 20%) can be expected. If the long term growth continues, we can then expect to see 20% year over year appreciation in the stocks as earnings grow and PE's remain stable.

Cloud Computing Stocks
Right now, there are a multitude of companies which are investing in the future of cloud computing, but there are only a few stocks in which cloud computing forms the bulk of their revenue. Here are four stocks that will benefit greatly from the continued growth of cloud computing.

1. Rackspace (RAX)
2. Terremark Worldwide (TMRK)
3. Google (GOOG)
4. Salesforce.com (CRM)
5. Equinix Inc. (EQIX)

Rackspace and Terremark Worldwide are two of the most pure play stocks in this sector. Both of these companies provide a series of cloud computing services such as cloud applications, computing, email, collaboration, hosting and other services. Rackspace is the clear leader of the two with significantly more revenues and earnings.

Other companies that are taking advantage of the secular growth in cloud computing include Google and Salesforce.com.

Google has already brought online its google docs service which allow the collaborative creation of documents, spreadsheets and presentations. There's no doubt that Google will continue to develop its suite of cloud computing applications and platform.

Salesforce.com is perhaps one of the leading companies to provide software utilizing a cloud computing model. By providing all of its services to all of its clients on the cloud, they are able to reduce infrastructure and IT costs of their clients while delivering a full suite of customer management services. I would not be surprised to see Salesforce.com leverage their expertise into new ventures in the future. Nor would I be surprised to see Google buy Salesforce.com outright!

And finally, Equinix Inc. provides services (the hardware and networking) to place applications and critical systems on the cloud. This will reduce costs for their clients and allow a new distribution method to deliver software.

Shortly, I will be providing an overall valuation of these companies, so stay tuned...

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Disclosure: No positions