First Sign Of A Cloud Bubble Ready To Pop - An ETF

On July 5th, First Trust launched an exchange traded fund (ETF) designed to help investors capitalize on the growing market for cloud computing. I'd be excited about this sign of maturity for the market if the fund let you invest in the companies that are truly driving cloud computing, but most of them aren't publicly traded. Now don't get me wrong, there are clearly some cloud leaders in the ISE Cloud Index, such as Amazon, saleforce.com and Netflix, but many of the stocks in this fund are traditional infrastructure players who get a fraction (at most) of their revenues from cloud computing, such as Polycom, Teradata and Iron Mountain. The fund is a mix of cloud leaders, arms dealers and companies who are directionally heading toward the cloud - dare I say "cloudwashing" their traditional revenue streams. 

The bigger question, though, is should anyone invest in this fund? Ignore the name and why not. Many of these stocks are market leaders in their respective areas, so if you are looking for a good technology fund, this is probably as good as any. 

Should you invest in it as a vehicle to capitalize on the cloud trend? That's where it gets questionable. The above point should be a factor but second should be what you are expecting as return from your cloud investment. While the hype suggests that cloud is the hot trend and media such as Nick Carr's book The Big Switch suggest all IT is going this way, we'd recommend taking a more skeptical approach. As I mentioned on CNBC last week, our research shows that while most enterprises are starting to invest in the cloud, they are most certainly not shifting over to it in a big way any time soon. And in fact, we'd argue that most applications have no business being in the cloud

A lot of the more recent hype has been around private clouds, which would explain why so many enterprise infrastructure and software players are in this ETF, but again our data shows that this is a long haul for enterprises. In fact, according to our data, only about 6% of enterprises are even ready to manage a private cloud. The majority of enterprises who say they have one actually just have a well-run server virtualization environment. That's certainly not a bad thing, and they should be proud of how far they have come, but there is a clear line between this and a private cloud.

If you want to capture the cloud sweet spot, look to invest in software-as-a-service companies, as this segment of cloud computing is the most mature, according to our TechRadar research (look for an update to this analysis in the fall) and thus seeing the strongest enterprise adoption. But even here, I'd temper your expectations on growth percent expected. If cloud stocks start to show growth well ahead of real market growth, it might be time to step away and take your profits. 

Categories:

Comments

A different cloud perspective

Hi James,

Let me share a different perspective from the SMB and MSPs that service them.

We all remember the dot com bubble for that over-hyped, passing trend called the “Internet”… oh wait. Examining one aspect of an industry and then making overall predictions might not be the best approach. Sure, there will be “cloud” companies that will go bust and trends that slow, just like many “internet” companies went bust and just like in every emerging and established industry, companies go bust and trends ebb and flow (financial meltdown?).

I guess it still comes down to sound business decisions? Here is one, millions of SMB owners are tightening their budgets and instead of spending $6-$12k on their next SBS server and thousands more for maintenance for the next three years. They will call up their MSP and IT professional and say, “Hey I heard this cloud thing can give me Exchange, SharePoint and other features of SBS for a low monthly plan, we are thinking of going with Google or Microsoft, what do you think?” At that point the MSP might be paralyzed with fear because they don’t have a strategy or they can say, “Client, I am so glad you called. We partnered up with an IaaS vendor (FailProof Technology) and were able to setup similar services of our own. We were just finishing up the info packs to send to you. We can give you a more customized offering for the same price. Can we setup a time to talk it over?”

As an MSP or an IT professional it isn’t feasible to just resell third party SaaS solutions, even if it is because they are “mature”, which I don’t know what that means. What is feasible is what some of them have been doing for years before cloud was cool, which is host their clients infrastructure on their server or data centre. However, instead of charging $80 plus per user for a dedicated hosted SBS, which was necessary to cover their high datacentre costs. Now they can leverage IaaS partners like FailProof Technology to brings their costs drastically down. While others while finally be able to offer the same services because it is finally cost effective.

My two cents,
Akaid Diaz - President
FailProof Technology Inc. – Cloud for the MSP and IT Professional

University of Washington Conference Call on Cloud Computing

Hello James,

I found your blog and wanted to see if you might be interested in writing about a Certificate program at the University of Washington on the topic of Cloud Computing. It's a program which is available both in the classroom and online and we're trying to get the word out among key bloggers within this community. Would you be interested in participating in a conference call with other bloggers to learn more about the program? As program director I would participate along with some faculty and/or board members from the program so you could learn more about this program offering during the call. We can also provide you with some useful content that you might find helpful in writing a piece about the program. Lastly, if you have colleagues or fellow bloggers that you know about and whom you recommend we should include, please feel free to let us know.
Thanks very much for considering this request.

Erik Bansleben, Ph.D.
Program Development Director, Academic Programs
UW Professional & Continuing Education