Tech Investors Should Keep Their Heads In The Cloud

by: Jake Mitchell

Cloud computing is considered by many technology and investing experts as the next great advancement within the Internet's evolution. Cloud Computing allows users to seamlessly integrate everything from computing power to computing infrastructure, applications, business processes to personal collaboration, and it can be delivered to users as a service wherever and whenever they desire. The service increases consumer's bandwidth while simultaneously decreasing overhead expenses as it involves no cost of ownership

The industry is rapidly expanding and Forbes recently stated that cloud computing will be redefining the mergers and acquisition landscape in 2013. This is primarily due to the fact that mobile and analytics technologies accelerate as software vendors look to fill gaps in their product and service strategies. This increase in demand for more protection over online documents has lead Gartner Research to state that they anticipate the global cloud computing market will grow 18.5% in 2013 to $131 billion, up from $111 billion last year. The report went on to declare that North America, representing the largest market in the world, responsible for 59% of new cloud computing spending through 2016.

According to the latest study from Juniper Research, the number of mobile cloud computing subscribers is expected to grow rapidly in the next five years. cloud-based mobile market will generate annual revenue of $9.5 billion in 2014 from $400 million in 2009, at an average annual increase of 88%. I personally believe companies that are able to provide the widest array of services while at the same time allowing consumers to reduce their CAPEX will prove to be the biggest winners.

With so much projected growth in the sector, now appears to be an excellent entry point for growth investors. While many traditional investors will own the market leaders such as VMware, Inc. (VMW), which I expect will maintain their blue chip status. I believe this industry will create better investment opportunities for emerging growth investors under the theory of a "high-tide, raising all ships."

Therefore, I would like to examine several of the smaller, yet rapidly growing cloud computing companies that investors looking for a higher risk/reward scenario should be evaluating in 2013.

Picks to Click

8x8, Inc. (EGHT), provider of innovative, cloud-based business communications and computing solutions. The company's specialized cloud computing platform includes virtualized public cloud servers and enterprise cloud virtual data center hosting services. The company just signed a 3 year partnership with Softbank that will license 8x8's subscription-based "Zerigo" enterprise cloud software. The agreement calls for 8x8 to license its Zerigo software and to develop some additional related software for Softbank to provide virtual desktop interface (VDI) services to its customers in Japan and throughout the world.

I am optimistic about the growth potential of 8X8 for many reasons. However, their ability to establish a long term relationship with Softbank leads me to believe that they will drastically improve their commercialization abilities. The industry is rapidly growing and 8X8 has established strong business partners that will allow them to navigate the changing marketplace.

Fusion Telecommunications International, Inc. (NASDAQ:FSNN) is a cloud services provider offering a comprehensive suite of cloud communications, cloud computing and managed cloud solutions to small, medium and large businesses and slowly making itself a player within the emerging cloud computing industry.

I selected Fusion because of their vast platform of service offerings. The company specializes in unified communications, hosted voice, managed network services, Infrastructure as a Service, data center services, and a complement of managed cloud solutions such as storage, security and disaster recovery. Additionally, the company recently announced a strategic agreement with Unisys (UIS) to market a fully integrated suite of secure network and cloud services, with an emphasis on leading-edge Unisys security solution. This partnership will effectively sell clients secured access to the cloud while providing military-grade encryption and a unique "bit-splitting" technology that separates data into multiple packets as it moves through the network and to storage devices, and then authenticates and reassembles the information packets for delivery exclusively to authorized users.

The company also significantly improved both their balance sheet and cash flow via the acquisition of Network Billing System, LLC "NBS," NBS is a Unified Communications and cloud services provider. The company previously generated $26.5 million in revenue in fiscal 2011, more than 95% of which is contracted and recurring monthly, and $4.9 million in adjusted EBITDA. The new Fusion is expected to generate between $65 and $70 million in annual revenue, and achieve positive adjusted EBITDA in 2013.

j2 Global, Inc. (NASDAQ:JCOM) provides Internet services through its two divisions: Business Cloud Services and Digital Media. The Business Cloud Services Division offers Internet fax, virtual phone, hosted email, email marketing, online backup, unified communications and CRM solutions. j2 Global is more a of retail consumer/small business selection. The company is currently hedging against the sliding housing market and actively targeting contractors and home repair professionals via their loud services like eFax®, an online fax service, and eVoice®, a business phone service for mobile professionals, to help them work more productively in the field while keeping costs down. I believe they offer an interesting alternative by targeting this underserved market. This company stood out to me simply for their foresight to adapt to changing market conditions. Management is thinking proactively and their attempt to stay ahead of the curve is sends an encouraging message to prospective shareholders, one that states they will do whatever is necessary to thrive in this emerging marketplace. Alteva (ALTV), a cloud-based Unified Communications (UC) solutions provider, delivers cloud-based UC solutions including Voice over IP phone systems and service (VoIP PBX), hosted Microsoft Communication Services, fixed mobile convergence, and advanced voice applications for the desktop. The company's special sauce is in their ability to enable businesses of any size to communicate more efficiently with hassle-free communications tools.

My final selection, Alteva (NYSEMKT:ALTV), was chosen for its strong UC capabilities. While it may not be as diverse as the other choices it has certainly established a strong lead over its competitors in this business. Their commitment to the industry was evident in their overlaying a UC division on an already stable, regional broadband platform has allowed them to secure a strong advantage within the market.

The internet is constantly evolving and we appear to be in the midst of the "Age of the Network." I believe these aforementioned companies are completing the necessary steps to create profitable growth engines and compete with market leaders within the cloud computing industry. They appear poised for significant improvements to both total revenue and cash flow during 2013. These are certainly stocks that growth investors of any size should consider for their portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.