Want to Get Virtual? Here's How to Invest in the Cloud

As the era of cloud computing heats up, many of us are still left wondering what exactly the “cloud” is. What does the cloud look like? Where is the cloud? Are we living in the cloud?

Well, we may not be technically living in the cloud, but cloud computing technology certainly surrounds the life we currently live. Interacting with the cloud is a commonplace occurrence nowadays: hailing a ride from Uber or Lyft, listening to music on Spotify or Apple’s AAPL Apple Music, asking Siri or Amazon’s AMZN Alexa a question about the weather.

Cloud computing, though, is made up of more than just our favorite smartphone apps and virtual assistants. It’s a booming market, and companies from every facet of the industry either have a cloud computing product on the market, or are working diligently to get one there.

What, actually, is cloud computing?

Breaking it down, cloud computing simply means storing and accessing data and applications over the Internet, rather than your computer’s hard drive, which is referred to as local computing. Local computing is how the industry worked for decades. Everything you need is close to you physically, making accessing your data quick and efficient for your one computer, or others on the local network.

In contrast, cloud computing requires accessing any data or applications over the Internet, and with this one stipulation, it can be done anywhere, anytime, as long as there is an online connection. You’re not limited to a specific place or environment.

It’s easy to think about the cloud for an individual, one who utilizes the Internet almost all day long for various things, but thinking about it on a larger scale can be hard to do. The cloud for big businesses is much different than one for everyday consumers.

For example, businesses can employ something like Software-as-a-Service (SaaS), which allows companies to subscribe to an application over the Internet; Platform-as-a-Service (PaaS), which lets businesses create their own applications to be used company-wide; and Infrastructure-as-a-Service (IaaS), where companies provide virtual hardware, software, servers, storage, and other components to its customers.

Consumer examples

It’s easy to visualize the cloud today as similar to past flowcharts and representations that would paint the Internet’s infrastructure as a white, puffy cloud. But the cloud in action looks much different.

A fairly simple example of cloud computing today is Microsoft’s MSFT Office Online, which is an Internet version of the tech giant’s popular Office Suite of Word, Excel, PowerPoint, and OneNote. Microsoft also offers OneDrive, which is the company’s cloud storage and file-syncing tool; you can download any files you create locally to OneDrive.

Alphabet Inc.’s GOOGL Google division has a similar, but more popular, cloud computing offering to Microsoft’s version. Google Drive gives consumers apps like Google Docs, Google Sheets, and Google Slides, with the option of accessing them on devices other than a desktop computer like a tablet or smartphone. Google’s other services—Gmail, Calendar, Maps, etc.—can also be considered examples of cloud computing.

Not to be outdone by its main competitors, Apple also offers a comprehensive cloud computing tool. iCloud is used mainly for online backup, storage, and synchronization for mail, contacts, calendar, and much more, but the company too provides cloud-based versions of its Pages, Numbers, and Keynote software. iCloud data is available on any Apple iOS, Mac OS, and Windows device.

Amazon is another big cloud computing player. Its Prime members receive a bounty of storage for any music and images that are downloaded on its Amazon Cloud Drive; you can also store any Kindle-related content on this drive. Amazon Cloud Drive is basically an online storage hub for any digital products and services bought or created through Amazon.

Enterprise examples

Amazon also has its Amazon Web Services (AWS), the company’s cloud services platform. It offers its customers like Netflix Inc. NFLX computing power, database storage, content delivery, and other unique functions to help them grow. AWS allows Netflix to quickly deploy thousands of servers and terabytes of storage within minutes.

A force to be reckoned with in social networking, Facebook Inc. FB is making headway in the cloud after the creation of the Open Commute Project, a collection of shared computing designs that costs less to run and build than anything before it. This made the cloud affordable to Facebook. It does not yet rent out its cloud capacity, and when it does, Facebook stands to make a killing.

Other participants in the space include, Cisco Systems CSCO, which provides leading networking solutions for the Internet; IBM IBM, who offers a hybrid cloud for customized enterprise solutions; Oracle Corp. ORCL develops cloud-based software that helps companies manage and grow their businesses; and Intel Corp. INTC has its Intel Cloud Technology, which is built into its latest generation of computer processors.

How to put your money in the cloud

Like its burgeoning industry cousins of artificial intelligence and the “Internet of Things,” cloud computing is a sector of technology that investors should consider a wise, long-term investment. It’s a big, booming business, having already generated $100 billion back in 2012, and is slated to reach $500 billion by 2020.

But not everyone can successfully compete in the cloud computing industry. A company needs major capital, and enough cash flow to sustain the massive amount of spending it takes to enter the market. Building those huge data centers comes at an expensive price.

It makes sense to first think of the biggest names in the industry: Apple, Microsoft, Google, and Amazon. These giants are well-known and respected by both their customers and every day consumers, and their services are popular options for individual cloud computing. Their price tags, however, are not cheap, and they’re not the only players in the game.

Salesforce.com CRM has made a name for itself in the industry, and is one of the most highly valued cloud computing companies with a market cap of almost $55 billion. Unlike Microsoft and Apple, Salesforce has always focused its business around the cloud, giving them a distinct advantage in the industry.

Both Oracle and IBM have made increased efforts to highlight their respective cloud computing businesses. Each of the company’s cloud segments are growing at a faster pace than their total net revenues, which is a good and brag-worthy sign going forward. Oracle’s cloud SaaS and PaaS revenues grew 66% in the last reported quarter, while IBM’s total cloud revenues increased 30% in its most recent quarter.

Amazon’s AWS, though, is a true game changer, for both the company and the industry. In 2015, revenue for Web Services grew 70% to $7.88 billion, while the business saw revenues of $2.886 billion, or a year-over-year increase of 58%, in its most recent quarter. AWS reflects how influential cloud computing can be on a company and for its investors, and when executed correctly, it can, and will continue to be, a huge moneymaker.

If you are more interested in investing in ETFs, check out the First Trust ISE Cloud Computing Fund SKYY, a #2 (Buy) ranked ETF that focuses solely on cloud computing.

For another look at how to invest in the cloud, check out this episode of the Zacks Market Edge podcast:

Bottom Line

Like many of the things about the Internet, cloud computing, in many ways, is still uncharted territory. Its central ideas have been around for a while now, but the cloud has only recently made its way to consumers, in the form of apps and devices like the smartphone. Investors should seriously consider adding one of the industry players to their portfolio, whether small or big, individual or enterprise, in order to capitalize on this surging market.

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