Cloud Getting Ahead Of Itself

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Includes: AAPL, ADBE, AMZN, CMCSA, CRM, GOOGL, HPE, MSFT, T, VZ
by: Dana Blankenhorn

Summary

Excitement is in cloud, but investment is in software and infrastructure.

Stocks like Amazon thus may be overbought and those like Apple oversold.

WiFi is the glue that holds it all together.

Right now many investors see the only possible technology investment as being in cloud. Thus Amazon.Com (NASDAQ:AMZN) keeps getting bid up, along with Salesforce.com (NYSE:CRM), Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL).

But cloud means nothing without something to connect with. Clouds need devices and software applications in order to succeed. So right now, cloud may actually be overbought while the device and software spaces are oversold.

The trouble with the device market is that we think of it too broadly. We think in terms of things that people hold. We think of Hewlett-Packard (NYSE:HPE) PCs or Apple (NASDAQ:AAPL) iPhones. We see those sales rolling over and assume that the device market is dead. We forget that devices are just a means by which software applications are delivered. Hardware is software.

The device market is not dead. It is reinventing itself, spending money before making another push deeper into consumers' lives.

This investment is happening in two areas.

First, wireless infrastructure is being built-out rapidly.

Over the last year two fiber builds have occurred in my neighborhood. The first was for Comcast (NASDAQ:CMCSA) and Verizon (NYSE:VZ) Wireless. They went under the sidewalk. The second was for AT&T (NYSE:T). That one went into the air. Google trucks are just a few miles away and expected in the fall, and they too seem aimed at building underground.

The result is a wasteful duplication, but those whose neighborhoods are being overbuilt are seeing huge gains in the value of their real estate, relative to people in other areas. Investors who presently worry over the end of cable TV bundles are missing the point. All last-mile companies are now in the bit business, and demand for bits, especially wireless bits, most especially those served by WiFi, is only going to increase. Buying cable stocks now, while they are weak, is a very good idea for the long-term future of a portfolio.

Second, new voice interfaces are being slowly developed to take advantage of this new infrastructure. Voice is seen as the operating system of the future. What makes the Amazon Echo powerful isn't what it does today, but applications behind it that can slowly take over a high-end consumer's life, and then the middle-income consumer. Efforts by Microsoft, with Cortana, and Apple, with Siri, also depend on expansion in the device area in order to fully develop.

All this remains in an early stage. As was true for PCs 30 years ago, all the major players have their own "flavor" of the interface. Making it proprietary protects profits, in the view of management, but limits the current market, and before this can take off those limits will have to be removed. Compatibility is going to happen.

You can see where this is going in the auto market. Self-driving is rapidly moving from curiosity to feature. As it becomes a feature, the self-driving intelligence becomes a box. Power within the space shifts, from the companies offering the technology to the companies installing the technology, from the device makers to the car makers.

Meanwhile, in the cloud, power is moving up the stack, from the infrastructure, past the platform, to the software applications that actually provide value. Companies that have moved their own applications into the cloud, like Adobe (NASDAQ:ADBE), not only sell direct, with no middleman, but they see reduced costs, with improvements instantly available to all customers. Those companies that are discovered to have done this, like Adobe, are actually doing better than those that have long-trumpeted it, like Microsoft.

Technology investors, in short, are in a continuous state of catch-up with what is happening on the ground in the market. Both the cloud and devices will continue to move forward, and buying what's weak is going to deliver bigger gains over 3-5 years than buying what everyone is talking about over the next 3-5 months. So it's a good time to pick up some Apple, some Adobe, and some Comcast for infrastructure, while everyone else piles into Amazon.Com - a great long-term play but overdone right now.

Disclosure: I am/we are long AAPL, AMZN, CMCSA, GOOGL, MSFT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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