10 Companies That Will Profit From the Seismic Shift to Cloud Computing

The shift to cloud computing is significant and inevitable, and it is going to pay off very well for companies such asAlphabet (GOOGL - Get Report) , Amazon.com (AMZN - Get Report) and Microsoft (MSFT - Get Report) that provide cloud services. Of course, it will pay off for you, too, if you invest in these companies.

In fact, there's plenty of evidence that it's already boosting top- and bottom-line results for these three companies, all of which released quarterly results Thursday.

Microsoft's cloud business helped it to deliver better-than-expected revenue and earnings. The same thing happened with Amazon. Google also beat estimates for its third-quarter results, and although it doesn't break out its cloud revenue, its executives focused on its business selling cloud storage on the company's conference call, re/code noted.

These three aren't the only stocks that will reap the bonanza from the move to cloud computing either. They're among the 10 stocks in the following list. These are companies offering cloud services that are poised to provide investors with better-than-average returns. You should consider adding them to your portfolio.

• Amazon.com
• Box (BOX)
• Salesforce.com (CRM - Get Report)
• Alphabet, a.k.a. Google
• Hewlett-Packard (HPQ)
• Microsoft
• Qualys (QLYS)
• VMware (VMW)
• Workday (WDAY)
• Zendesk (ZEN)

Here is a chart with more information on each stock (courtesy of Ycharts.com):

You'll note that ROIC, or return on invested capital, is included as key metric. You'll also note that for half of the companies listed above it's negative. In past articles, I have advocated ROIC as the best metric to determine above- median shareholder return. The reason why so many cloud-computing companies have negative ROIC right now is that cloud technology is a disruptive area where large investment is required much earlier than cash flow begins. As this sector matures, you will see these companies all move to above-median ROICs. Also note that Hewlett Packard is splitting into two publicly traded companies. Once the split is completed, Hewlett Packard Enterprise (HPE) will be the company holding the majority of cloud assets and services. Lastly, Amazon and Google are diversified companies where cloud services for business are a small subset of the whole. It is my belief that both companies would be best served and will eventually spin off their enterprise cloud services organizations (i.e., Amazon Web Services).

Today, let's do a deep-dive exploration of why the transition to cloud computing is taking place and why it won't stop. Understanding this is crucial to understanding why the stocks above are worth watching -- and buying.

Put simply, most businesses are or will be moving the computer systems and applications they reply upon into cloud environments because this allows them to be more flexible and nimble, and to focus on their business, not on endless technology headaches.

The information technology department of a business in the future will not own, build and run information technology infrastructure, platforms and applications. Instead, it will set architecture and governance standards for an ecosystem of partners who provide technology services -- let's call them "technology enablers" -- in the cloud. Management will not have to expend valuable time and effort determining how to provide for its company's technology needs. It can now spend this management bandwidth on the company's core competency.

Given the evolution of the cloud, should a company ever make a computer hardware or software purchase again?

Every time a company makes a data center hardware or software purchase, it is hurting its return on invested capital and diminishing the chance that the company will stay focused on its core competency. By the time the capital budget is available to replace the servers, employees will be working on old hardware and systems, putting the company at a competitive disadvantage. By buying IT hardware, the company commits to a never-ending capital expense and creates declining value on a key metric of its valuation, ROIC.

Companies don't need to buy those servers or the majority of the software because their technology partners can provide those things in cloud environments. They will provide these technology enablers on a pure consumption, operating expense basis, as companies and business end-users need them.

Companies are realizing that when it comes to the technology they use, the only thing that should matter is the outcome to the business user, the marketing manager on the road, for example. They must make applications and data available in an infrastructure that will function regardless of geographic location or type of computing device. Employees don't need to know, and frankly don't care, if their applications and data are distributed on a large public cloud such as Amazon Web Services, or Hewlett Packard's virtual private cloud, or Microsoft Azure. They just need access to the applications and data they need to do their work.

Now let's back up and look in more detail at what cloud computing is. Let's compare the cloud-based technology operating model to the traditional way of doing things.

In the traditional way of doing things, a company would maintain a data center. You would know that it was physically located at a specific physical address and that it had, say, 100 servers with 400 central processing units and 320 terabytes of storage. The company would have to make capital expenditures to purchase and refresh the hardware and software at this data center every four or five years. What's more, in daily use, when a CPU or the storage maxed out, one of the company's applications would crash.

In the cloud environment, however, the company doesn't make capital expenditures, or CAPEX. If its workload expands, the cloud recognizes this expansion in real time and provides more CPUs and storage as need. If the workload decreases, the cloud downsizes the infrastructure, and the company is charged appropriately. And the charge for the cloud service becomes an operating expense. The company faces no CAPEX expenditures, no expense related to being over capacity and no risk of system outages related to being under capacity.

The National Institute of Standards and Technology (NIST) defines cloud computing like this: "Cloud computing is a model for enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction." NIST goes on to describe five essential characteristics of cloud computing:

1. On-demand self-service. A consumer can provision computing capabilities automatically as needed, without needing to interact with the human agents of each service provider.
2. Broad network access. Capabilities are available over the network and accessed through various client devices (e.g., workstations, laptops, tablets and mobile phones).
3. Resource pooling. The provider pools its computing resources in order to serve multiple consumers using a multitenant model, dynamically assigning and reassigning physical and virtual resources according to consumer demand. The customer generally does not know the exact location of the provided resources. Examples of resources include storage, processing, memory and network bandwidth.
4. Rapid elasticity. Capabilities can be elastically provisioned and released -- in some cases automatically -- to scale rapidly outward and inward according to demand.
5. Measured service. Cloud systems automatically control and optimize resource use by leveraging a metering capability at some level of abstraction appropriate to the type of service (e.g., storage, processing, bandwidth and active user accounts). The use of resources can be monitored, controlled, and reported, providing transparency for both the provider and the consumer.

In today's competitive and disruptive business environment, companies must have a continual transformation environment that ensures flexibility and prevents a company from being "locked in" to a strategy, tactic, cost, process or location. The outcome must be so flexible that a firm can abandon an operation, function, process or location in a matter of weeks (or days). In the same manner, a company must be able to initiate new operations, functions, processes or locations in the same time frame. Business enablers that are cloud based are the basis of this type of continual transformation operating model.

Here are some of the advantages for companies that have cloud-based IT:

• Access to data from anywhere, at any time (as with email), using an ordinary Internet connection
• Relief from the stress of buying software licenses for every tool they install
• Elimination of hardware costs (because apps and data are stored and copied on the cloud)
• Reduced processing-power requirements for their end-user computers (without reduction in performance)
• Money saved on IT support, server maintenance and data storage space
• Solving complex problems quickly and easily by using a grid of cloud computers instead of a single personal computer
• Ability to grow a business at its own pace, without stressing systems as customer bases grow
• No CAPEX, and lower costs (You pay for cloud services based on the consumption you use, like taxi fares. And like a taxi, the meter stops running as soon as you stop using the cloud.)

Under the cloud-computing umbrella, there are different types of cloud deployment models, as shown in Figure 1 below. The IT department of the future, as a service broker to its ecosystem of providers, will set architecture and standards for integration and interoperability. This will allow the company to operate seamlessly from a technology standpoint while utilizing different types of cloud deployment models. Hewlett Packard refers to this as the converged cloud.

Figure 1. Cloud deployment models vary and most companies will utilize them all

Cloud Deployment Models

Companies are moving to three primary cloud deployment models: public cloud, private cloud, and managed (or virtual private) cloud. To the business user, companies are implementing a utility model: flip the switch, and the light goes on. While it may (and should) matter to a select few in the IT department whether an application is deployed on a public, private or virtual private cloud, this should be opaque and is meaningless to the business user.

• Public cloud. The most recognizable model of cloud computing is the public cloud model, which provides cloud services in a virtual environment that uses shared physical resources and is accessible over a public network, usually the Internet. Google, Amazon Web Services and Microsoft Azure are best known in this space. The public cloud differs from private clouds -- which are accessible only for a single organization -- in that it uses a single shared infrastructure to provide services to multiple clients. Generally, public cloud environments are the most cost-effective, but they should be used for workloads that do not have extremely sensitive data and for those that have lower service-level requirements. Typical uses for public clouds include email, messaging, and other office and noncritical applications.
• Private cloud. Private cloud infrastructure is for the exclusive use of a single organization. Private clouds are well suited for mission-critical applications with high service-level requirements and applications with sensitive data, including personally identifiable information data and protected health information data (such as that covered by the Health Insurance Portability and Accountability Act [HIPAA]). Hewlett Packard and VMware are well recognized as the leading private cloud providers.
• Virtual private cloud (VPC), or managed cloud. A VPC is a cloud-computing service offered by a cloud provider that sets aside a portion of its public cloud infrastructure for private use. A public cloud provider manages the infrastructure of a VPC, but the resources allocated to it are not shared with the provider's other customers. This model is ideally suited to critical enterprise resource planning applications such as finance and human resources. Hewlett-Packard and Amazon Web Services have robust VPC offerings.
• Converged cloud operating model (CCOM). Key aspects of the utility delivery model are a seamless user experience, interoperability and unified management. Determining what workloads are delivered by what cloud deployment models will be a key role of the IT business unit of the future. In a converged cloud operating model, workloads are governed and managed on a common architecture that spans the three deployment models (and even an interim deployment model that includes traditional IT). The end result is one layer of interoperable services and unified management for all workloads regardless of where deployed.

Within the cloud deployment models, different types of service models are needed for both business and IT users; these service models can be deployed on each of the deployment models described, depending on requirements. These service models are:

• Software as a Service (SaaS). SaaS enables a business user to run the provider's applications on a cloud, usually on a pay-per-use basis. The applications can be accessed either through a thin client interface such as a Web browser (e.g., Web-based email) or via a program interface. The consumer does not manage the underlying cloud infrastructure, except possibly for a few user-specific application configuration settings. The enterprise market, like the consumer market, will soon be dominated by SaaS offerings to business users, who will access these applications via their enterprise app store. Salesforce.com, Workday and Zendesk are leading SaaS providers.
• Platform as a Service (PaaS). PaaS enables a business user to deploy onto the cloud infrastructure applications acquired or created by the business using programming languages, services and tools supported by the provider. The business user does not manage the underlying cloud infrastructure but has control over the deployed applications and may also control configuration settings for the application-hosting environment. While falling into multiple service models, Box is a leading provider of storage PaaS and Qualys security and compliance PaaS.
• Infrastructure as a Service (IaaS). IaaS enables the user to provision CPUs, storage, networks, and other fundamental computing resources to deploy and run arbitrary software, such as operating systems and applications. The user does not manage or control the underlying cloud infrastructure but has control over operating systems, storage, and deployed applications; the user may also have limited control of select networking components (e.g., host firewalls).

Chief information officers at lots of companies are making an attitudinal shift. They are asking, "How can I get the largest ROIC with the least amount of assets and the fewest number of people?" CIOs are being valued by how much business workload that is not in the company's core competency they can push out into their ecosystem, not for how much they keep internally. The cloud is the foundation of that ecosystem, and cloud computing companies will continue to experience growth above median.

Scott Stawski is author of Inflection Point: How the Convergence of Cloud, Mobility, Apps, and Data Will Shape the Future of Business.

By Scott Stawski

Source:http://www.thestreet.com/story/13333647/1/10-companies-that-will-profit-from-the-seismic-shift-to-cloud-computing.html?kval=dontmiss