Investing in the Cloud

Investing in the Cloud

The cloud is growing.  Over the next 15 years enterprises will spend billions of dollars finding ways to leverage commodity compute (IaaS/PaaS), flexible platforms that support very specific demand (PaaS), and software that automates non-differentiating practices (SaaS).  Almost everyone in IT knows this, the question is, “How do I make money off of knowing this?”  Well, there are several problems and only a few answers.

The Problems

There are a ton of problems with investing in cloud, but four are top of mind for me:

  1. Lack of Pure Play Cloud Companies – Ladies and Gentlemen, the undisputed heavy-weight champion of Cloud Computing, Amazon.  Weighing in at $XXX of revenue and with profit margins of nearly X%.  That’s right, Amazon is far and away the leader in cloud, but they don’t break out a line item for AWS on their income statement.  It makes it difficult to size the market or set expectations for earnings.  An analyst at Investor’s Business Daily estimates that Amazon’s cloud revenue is roughly $1.5B.  That number is roughly 20% larger than their largest pure play competitor, Rackspace, but still only represents 3% or 4% of Amazon’s total revenue.  That means that an investment in Amazon’s stock is almost completely an investment in their retail business and has very little to do with cloud.  There are similar stories to with other major cloud players like Google and IBM.
  2. Evolving Market – The next big thing in cloud is probably not what we think it is.  Google Apps had a good run, Box may be stealing its lunch.  OpenStack could commoditize IaaS further or VMWare’s CloudFoundry could emerge and top it.  We know which way the market is generally going, but investing in an individual company is virtually impossible.
  3. SaaS is Just a Model – SaaS software is going to be HUGE in taking cost out of large enterprises.  Companies ,like Salesforce, have already proven that large functions, like CRM, which are done essentially the same way by almost every company can be run effectively in the cloud.  The problem with betting on a company like Salesforce is that you’re not just betting that SaaS is the right model, you’re also betting that their software is the best software.  You could bet on Salesforce and be right that CRM will keep moving in to the cloud but be wrong about which company will win that business.
  4. Enterprises are Slow – Most of the money that’s out there to be made in cloud computing is hiding in Enterprise IT budgets.  These budgets are REALLY slow to change.  This makes it very difficult to decide whether the really big dollars will start to fall today, tomorrow, or in 10 years.

A Few Early Answers

While these problems make it difficult to bet on cloud computing even if you know it’s coming, there are some things you can do:
  1. Stocks – There are a few pure play stock investments that you can make.  An even better play is to short companies that are being threatened by the cloud.  I talked about some of the existing options in this old post, but the one I’m really excited for is the company that VMWare and EMC are forming to hold their cloud plays.
  2. Your Career – The better way to invest in the cloud, if you have the skills, is to make sure you don’t neglect it as you make your career decisions.  Make sure you keep up on the latest news and technologies, grab a couple Amazon servers or a Heroku instance and make yourself an app, and if possible find a way to consult on or influence your company’s cloud direction.