If you needed any more proof cloud computing is here to stay, it was delivered in spades last Thursday.
That's when Microsoft (MSFT) - Get Reportand Amazon.com (AMZN) - Get Report, arguably the two leaders in the space, delivered better-than-expected quarterly earnings, helped in a big way by their cloud businesses.
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At Microsoft, three numbers stood out: a 70% year-over-year revenue jump (excluding exchange rates) from Office 365, its subscription-based suite of productivity software; a 13% revenue gain from server products and cloud services; and a doubling of revenue from its Azure cloud platform, a set of tools for building and managing apps.
Amazon, for its part, reported a 78% sales surge at its Amazon Web Services platform, helping propel the company to an unexpected profit.
Those results jibe with the latest research: according to July estimates from IT research firm IDC, total spending on cloud infrastructure (things like servers, switches and storage) will grow at a 15.6% compound annual rate from 2014 to 2019, when it will reach $54.6 billion, or 46.5% of all IT infrastructure spending. To put that in context, the agency sees noncloud IT infrastructure spending declining at a 1.4% CAGR in that period.
Spending on public cloud infrastructure -- or from expanding providers like Amazon and Microsoft -- will grow more quickly than spending on private clouds, which are set up to serve just one company.
Three More Ways to Make Rain
Following are three options for investors looking to grab a share of the dollars pouring into the cloud. One is a large-cap "old tech" chipmaker, another is a more volatile and much newer stock with a fast-growing software-as-a-service offering, and the third is an exchange-traded fund holding some of cloud computing's top names.
Intel is best known for making personal-computer chips, but the times they are a changin' at the tech behemoth.
In the company's third-quarter earnings release, its Data Center Group, which makes server chips, was the strongest performer of its four segments on a year-over-year basis, reporting a 12% sales gain, thanks to strong demand from public cloud providers. The Internet of Things Group posted a 10% year-over-year rise, while the Client Computing Group (chips for PCs and mobile devices) saw a 7% decline.
That continues a trend we've seen in the past several quarters, and it's shifting the company's revenue mix toward faster-growing areas: in the year-ago quarter, the Client Computing Group accounted for 63.1% of Intel's revenue, but that was down to 58.5% this time around. Meantime, the Data Center Group's slice rose to 28.6%, up from 25.4%, and the nascent IoT segment grew to account for 4.0% from 3.6%.
To be sure, Intel is facing headwinds as the sluggish global economy forces many companies to rethink their IT investments. In the postearnings conference call, CFO Stacy Smith said the Data Center Group's full-year growth would come in below Intel's forecast of a 15% rise (though still at a double-digit clip), largely because of weakness on the enterprise side. But he also said the cloud business would exceed Intel's expectations.
Earlier this week, the company said it would team up with Oracle in an effort to encourage IBM clients to switch to Oracle's cloud services, powered by servers running Intel chips.
This is a good example of a SaaS company on the move. It's a fraction of the size of Intel, with a market cap of just $1.72 billion, so risk is much higher here. It's also a relatively new stock, having started trading in May 2014.
The company's customer service software helps businesses manage and speed up responses to queries over channels ranging from old-fashioned phone calls to social media.
Zendesk continues to see strong sales growth: Second-quarter revenue jumped 63% year over year to $48.2 million, topping the Street's forecast of $46.3 million. On an adjusted basis, losses narrowed to 8 cents a share from 16 cents, ahead of the consensus estimate of a loss of 11 cents a share. The firm's third-quarter estimates also beat analysts' forecasts, and it bumped up its full-year guidance, as well.
The company is clicking with customers, adding 3,000 in the latest quarter, bringing its total above 60,000. Many of its users are small- to medium-sized businesses, which Zendesk focused on when it was founded in a Denmark loft in 2007.
Now based in San Francisco, it's focused on bulking up its sales force -- and its software -- to take on larger clients with more complex needs. Its customer list includes Silicon Valley darlings such as Uber, Airbnb, Dropbox and OpenTable.
Another positive sign: the company is pulling in business on reputation alone. According to Rob DeFrancesco, the Investing Daily in-house technology analyst, 65% of Zendesk's new leads come from organic search, referrals or other unpaid channels. DeFrancesco rates the shares a buy up to $25.
Lastly, if you're looking an all-in-one solution for cloud investing, look no further than the only exchange-traded fund focused on the space.
This ETF holds some of the biggest names in cloud computing, including both large-caps with a presence in the industry -- see its largest holding, Amazon.com, at 5.3%, or Alphabet in the No. 2 spot at 5.0% -- and purer plays, such as SaaS provider (and Zendesk competitor) Salesforce.com at 4.1%.
The fund is weighted toward software, at 35.6% of its portfolio, followed by Internet software and services (19.7%) and communications equipment (14.4%). Its expense ratio is 0.60%.
SKYY, which holds about 36 stocks, is up 6.5% year-to-date, largely on the strength of strong performances from the likes of Amazon, Facebook and Google/Alphabet, but it's well positioned to keep benefiting from the shift to the cloud.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.