By: Nick Eden and Scott Redler
“There are many ways of going forward, but only one way of standing still.” – Franklin D. Roosevelt
IT is moving forward, and, as Mr. Roosevelt said, there are many ways to go. Recently the big buzz has been “cloud computing”. What is cloud computing? Why is it so popular? What companies are leading the revolution, and how can investors take advantage? Well, if you are an active trader or investor, you have probably heard of VMW even if you don’t know all that much about cloud computing.
Back in January, we sent out a chart highlighting VMW as a stock that the long-term swing trader or investor could stash away for 2010 and be very happy with its performance. The stock has performed even beyond our expectations, nearly doubling in price. In the meantime, active short-term traders have had several opportunities to take advantage of the strength of VMW in this market. Whenever the market enters a correction, even the strongest stocks experience pull backs. One of our goals as traders is to identify the companies and stocks we want to own, and to find buyable dips to get good price entries on those stocks. VMW has led the pack all year in that department. Whenever technical buy signals align with a powerful fundamental story, we become very excited about an opportunity, and that has certainly held true in this case.
Today cloud computing is well defined, although still very much evolving. There are three models of the cloud, each still holding to the basic description below. Public cloud (or external cloud) describes cloud computing in the traditional mainstream sense. In this model the cloud is hosted by a third party, such as Amazon or Google, and is accessed over the internet via web application. One of the advantages of a public cloud is avoiding the initial hardware cost. Typically when someone talks about “cloud computing” this is the model that they are speaking of. The private cloud (or internal cloud) claims to have the benefits of cloud computing without the pitfalls. It is a cloud hosted on an organization’s own servers and thus does not avoid the cost of buying your own hardware, but may offer a higher level of privacy and security. There is also a community cloud, which is a cloud established by several organizations to share resources, so naturally each organization would have their own hardware as well.
Among the features of cloud computing is the ability to provision resources rapidly, the entire cloud is on demand and its resources are allocated as needed. It is also capable of being accessed from anywhere via the internet, and from any device, so you are no longer tethered to the same machine or forced to be on-site. Security can often be as good or better than traditional systems because providers are able to afford better security software and hardware than the consumer. Maintenance is also much easier since cloud applications do not need to be installed in all machines, updates and changes can be done quickly and reach the clients immediately because all software is centralized.
Could computing is certainly exciting, but what are the pitfalls preventing it form taking hold? There are some very big problems with cloud computing that would serve as a buzz kill if it weren’t for VMWware. The first hurdle is the opportunity costs associated with the implementation of a new cloud computing model. The switchover takes time and money, both valuable commodities to businesses. Second, all applications must be re-written to run on whichever proprietary cloud they choose and then they are locked in unless they want to re-write for another cloud. Once they have transferred over to the cloud, if they had internal servers, they are left with now unused servers which become a sunk cost. Another issue is that while it is claimed that the public cloud is available across the internet, performance can vary based on location. Some companies have attempted to split up their applications, with some operating through the cloud and some left in-house, which isn’t always a viable solution. Now, there are private clouds, which can be placed on internal servers, but that still leaves the problem of disruption and application re-writing, neither of which can be done overnight.
In the end, security is the most imporant thing to business owners and IT departments alike. “The richer the pot of data, the more cloud service providers need to do to protect it,” said IDC research analyst David Bradshaw. One important thing to realize is that on public clouds, it’s not just one company on the cloud, it’s several companies. While each are seperated by access permissions, it is still a concern. What if someone managed to break through the levels of security? You and every other company on that cloud may be at risk. That is why it is imporant to get as much information about a provider as possible. It may sound like a hassle or a risk, but it is also very possible that they have better security measures in place then any individual company could afford for their own system. The need to go through these protocols is part of the reason there is general distrust towards the public clouds, although with time this distrust may dissipate as clouds become more efficient and sophisticated.
The company at the fore of overcoming these challenges is VMW. VMW is the leader in cloud computing, although they don’t follow the same path as other cloud providers, instead focusing on a private cloud software with the option to tap into a public cloud’s resources. What makes this an improvement over any previous operating system is that it is designed to handle a large infrastructure – CPU’s, storage, networking – as a seamless operating enviroment. Where previously there would be multiple servers, each handling specific operations, instead all hardware is part of the cloud allowing resources to be utilized much more efficiently. While this is the same functionality offered by any other cloud, it can be placed on your own servers, under your own control and supervision.
The cloud operating system offered by VMW is also able to run any application with no need to re-write applications or buy new software. It can be used to connect multiple data centers and share resources across the board. It also features the ability to monitor usage of resources so businesses can determine current and future needs.
What about VMW’s main competitors? Akamai (AKAM), a public cloud company, is another name to keep your eye on in the cloud computing space. The company is making great strides towards providing even better reliability by using more locations of smaller datacenters, allowing for more uniform performance across the world. Google is every growing in every direction and offers the perfect example of a cloud application, the Google Docs and Calendar are free if you have a Gmail account. Amazon’s EC2 recently received a boost from Microsoft and can now run virtual Windows Servers, meaning anyone with running Windows servers can now be hosted by Amazon’s cloud.
While people can argue about how far cloud computing will take us, it is no longer a thing of the future, it’s here. VWM is making the transition simple and cost-efficient, which is much of the reason it has been such a hot stock over the last 8 months. At each pullback, we will look for opportunities to get involved buying it.
