A Cloudy Forecast

This year it is estimated that fully 80% of new commercial computer enterprise applications will have a cloud-based offering. Whether this turns out to be true, when it comes to the future of information processing, virtually every forecast sees clouds on the horizon in leading roles. It’s a market seen as too disruptive to ignore, expected to top $200 billion in revenues before 2020. It threatens the status quo, much as did the rise of the Internet itself. (Microsoft was late in embracing the Internet. Don’t look for it to be as slow when it comes to clouds.)

The question now seems only to be the form that the revolution will take, whether it will evolve into “Platform as a Service,” “Software as a Service,” or remain more broad-based as Enterprise Content Management markets, all which fall under the general industry of cloud computing. Additionally, security issues have to be resolved to the point that businesses will feel comfortable storing customer-sensitive data in clouds.

Cloud computing is simply a way to deliver software and applications over the Internet and manage data stored remotely. For the customers of cloud providers, it eliminates the need for your PC to be connected to a server. The information accessed by users is found in the “cloud,” data and software stored in remote servers. Space on these servers is usually leased from the cloud provider. Software can be modified company-wide much more quickly, lowering upgrade costs and downtime. It also permits employees to work remotely from any place they can establish an Internet connection. Furthermore, the expense of maintaining the cloud is passed on to the cloud provider.

The key revenue drivers in this industry are licensing revenue (income from leasing software and applications to end-users), leasing revenue (income from leasing data-storage space), consulting revenue, and sales income from the sale of specific software and applications to the end users. Any company that uses computers could potentially benefit from cloud computing. The distribution channel is the same for all providers: the Internet. Companies in this sector can literally compete on a global basis because all the customer needs is a reliable Internet connection.

Consolidation is anticipated among providers, so underlying it all, of course, is the question of who will gobble up whom. IBM (NYSE: IBM), SAP (NYSE: SAP), and Oracle (NASDAQ: ORCL) have all sought to acquire cloud and SaaS technology companies, a quick way to establish a cloud presence. In the meantime, Amazon (NASDAQ: AMZN), Google (NASDAQ: GOOG), and Apple (NASDAQ: AAPL) have already planted their flags.

• Amazon Web Services offers a cloud computing platform through a collection of web services for remote computing, such as EC2 and S3, designed primarily to help developers. EC2, for example, offers developers Amazon’s strong computing environment, essentially renting virtual computers, allowing developers to build failure-resistant applications.

• Apple’s iCloud allows users to store music, photos, and documents, which can then be seamlessly grabbed by any user devices, meaning total 24/7 wireless access. The result is the company’s latest step toward a fully cloud-based central processing station and warehouse for all things Apple.

• Google Cloud Connect brings a cloud to MS Office (or brings Office to a cloud). It lets users share, backup, and edit MS Word, PowerPoint, and Excel documents over a cloud, with a system that coordinates activities in order to avoid confusion. Documents can even be edited offline, and synchronized later when online.

A brief sampling of the investment opportunities in cloud computing can be found by looking at the following 3 companies, one new-comer, and 2 old-hands:

• GlobalWise Investments (OTCBB: GWIV), via its wholly-owned subsidiary, Intellinetics, is an example of a company that offers investors a chance to experience significant growth. GWIV has developed a platform that defines a new industry benchmark and game-changing approach by combining advanced virtualization and automated content management with an open and service-oriented architecture using web services. Trading at $1.55 a share, the company has a market cap of $50.51M. Because GlobalWise only recently became a publicly traded company, available historical financial data is limited. However, revenues increased 26.7% YOY for 2010 to 2011. Gross profit increased 26% in the same period. The company has multiple growth initiatives in place to accelerate the pace of future expansion.

• Broadvision (NASDAQ: BVSN) offers a cloud-based “network of networks” enterprise social platform, for the virtual, mobile, social enterprise. Basically, it’s designed to help businesses connect with employees, customers, and partners, and it’s fully cloud-based. Trading at $25.29 a share, the company has a market cap of $116.11M. Although recently falling on hard times — last year, revenues declined by approximately 19.8% compared to the numbers reported for 2010 — the company is well established in the industry and could be poised for a turnaround.

• More risk-adverse investors wanting a piece of the cloud action should look at Salesforce.com (NYSE: CRM). Salesforce.com, an enterprise cloud computing company, provides a social enterprise cloud platform and apps to help employees collaborate easily and connect with customers. Trading at $154.67 a share, the company has a market cap of $21.11B. Revenues for 2011 were 37.1% greater than the value reported for the prior year. According to MSN Money, over the last five years revenues have grown by an average of 35.45% per year.

As with any industry, cloud computing does have risks. Successful implementation of cloud technology is complex, and very easy to get wrong. There are constantly changing security-related and cost-related questions, issues which may not be fully appreciated at first consideration. Moreover, in spite of what is sometimes promised, cloud-based applications can be difficult to manage and to grow if not planned correctly. Although in-house processing and storage carries risks, working in a shared cloud environment means accepting and dealing with different degrees and types of processing and data risks to which some users may not easily adjust. In addition, individual user needs are dynamic, fluctuating as products change, and cloud options and pricing are changing at the same time, making it a singularly difficult world to predict.

Nevertheless, the move to the cloud by companies big and small is only accelerating, with new product and service offerings appearing daily, reminiscent of the 1990s when people first started hearing names like eBay (NASDAQ: EBAY) and Amazon. Some companies offer limited applications, some offer comprehensive platforms, but all can benefit customers by providing reduced software and hardware costs, simpler IT infrastructure, and increased efficiencies: all which can directly boost net income.

Investors wanting growth or diversification should take a close look at the clouds. In so doing, they will get a forecast of the future of large-scale computing and the companies that will provide out-sourced IT services, an area that shows potential signs of significant growth.

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