The Future of Cloud Computing

 
The Future of Cloud Computing

Google: A Huge Opportunity

Research in Motion: Another Innovator

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What in the world is cloud computing? Here are a couple of definitions provided by the National Institute of Standards and Technology and Wikipedia:

Cloud computing enables convenient, on-demand network access to a shared pool of computing resources, such as networks, servers, storage, applications and services that can be rapidly provisioned and released with minimal management effort or service provider interaction.

Cloud computing is the Internet-based development and use of computer technology. Details are abstracted from the users who no longer need knowledge of, expertise in, or control over the technology infrastructure "in the cloud" that supports them.

OK. Now my non-technical definition: For the casual user, everything you can do on your laptop, desktop, cell phone, smart phone, TV, DVD player, MP3 player, video game device and reader will be accessible using the necessary software, operating system, application and data from cyberspace. That means that you will be able to perform all of the above functions on any of your devices anytime, anywhere.

When we think about the potential for cloud computing, we conclude we could be on the brink of a new evolution similar in scope to the creation of the Internet--hopefully without the Tech Bubble that defined the early years of the Internet!

Cloud computing is in the very early stages of development and therefore difficult to define because it exists only in nascent form. Some types of cloud computing were developed years ago--we just didn't call cloud computing by its "politically correct" name.

Let's take a quick look at the history of the computer to figure out where we are now and where we might be going.

The first programmable computer was invented in 1936 by Konrad Zuse and named the Z1 computer. The Z1 was followed by a vast number of other new computers including the UNIVAC in 1951, the IBM 701 in 1953, the Apple I in 1976, and the IBM personal computer in 1981.

Back when mainframes were the backbone of computing, employees used "dumb" terminals to access the programs and data stored on the mainframe. Then desktop computers came along and provided users with the capability to store software and data, perform calculations, write documents and interact with servers and mainframes.

Cloud computing is quite similar to server/desktop systems. Rather than having dedicated servers in-house, cloud computing servers are located at remote locations and maintained and operated by service providers.

In the future, cloud computing service providers, such as Google, IBM, Microsoft, Hewlett-Packard and a host of others, will offer a large variety of software programs and applications, processing, networking and data storage for a fee. The fee might be a flat monthly rate or it may be based upon the amount of usage. Google, for example, now provides free email and also offers calendar, documents, spreadsheets, presentations, archives, Web pages and video sharing for $50 per month to casual users and small businesses.

What does cloud computing offer to you and me? The first advantage that comes to mind is mobility. With our cell phones and smart phones, we can go anywhere and still make calls, have access to our emails, etc.

A year ago, I purchased my first smart phone, a Google G1. This is four years after my daughter bought her first smart phone, the Apple iPhone. My kids are a lot more attuned to the latest electronics than dad! I have been amazed at all the applications that are available for my phone. And I am even more amazed to find out that I am now a full-fledged member of the cloud computing paradigm.

The number of applications available seems endless. Not only am I able to talk on the phone, store telephone numbers, take pictures and download emails, but I can also access my voicemail stored on my provider's computers. In addition, I can point my phone skyward and it will identify stars and planets even on a cloudy night! My phone has GPS features that help me figure out where I am and where I want to go. Finally, I am able to send emails and pictures, text, listen to music, play games, browse the Web, and do many other things.

How can all of my smart phone features fit into such a small device? My wife, who is a lot savvier when it comes to technology than I am, enlightened me. Many of the applications that I enjoy on my phone are accessed from my cell phone service provider, which is T-Mobile in my case. The applications are stored on T-Mobile's super-duper computers, so that I can use applications via their network of cell phone towers.

Information such as my voicemail is stored on my service provider's computers, but is instantly available whenever I want it, even if I use a landline and not my cell phone. Accessing my data on my provider's computers is part of the cloud computing mystique. Remember how annoying it was to come home to retrieve your messages on your answering machines?

My smart phone even has some advantages over my desktop computer. The Android operating system is downloaded and upgraded onto my phone from my provider's computers. Upgrades are automatically downloaded to my phone at no additional cost--Microsoft take heed!

If I can use all of these applications, and many more on my smart phone, why can't I have some of these conveniences on my computer or my TV? According to the experts, I will be able to make my computer and TV stand on their heads within two or three years. Hooray!

I really would like to enjoy more mobility with my computing. If I am away from my home, whether a mile away or 1,000 miles away, I want to access all of my programs, data, and information without carrying it around with me on my laptop. And I might want to make changes to my data and update data while I'm away. I also want the capability of having my wife or employee, at my worksite or theirs, make changes that I will be able to see and access wherever I am.

With cloud computing, I will be able to upload, work on, and store any type of file using my cloud service provider on a mini-laptop, tablet, smart phone, or other yet-to-be-invented device. Accessing my work files won't require a connection to my internal office network. Nor will I need to email files to myself. I am looking forward to cloud computing innovations.

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Two companies that are leading the way in cloud computing innovations are Google and Research in Motion.

Google (GOOG) is one of the most recognized companies in the world.  The company's mission is simple and successful: "To organize the world's information and make it universally accessible and useful."  Google generates revenue by providing companies with opportunities for targeted advertising.  

Thousands of companies use Google's AdWords and AdSense programs to promote their products and services on the Web with advertising relevant to the information displayed on search pages.

Google management has aggressively stayed ahead of its competition by expanding and improving GOOG's search engine and advertising. Founded just 10 years ago, the company's 2009 sales exceeded $23 billion with profits of more than $6 billion.  The balance sheet is very strong with no debt and $24 billion in cash. The company pays no dividend.

Google appears to be the leading developer of cloud computing. Google employees can now store most of their business and personal software and data, such as pictures, videos, presentations and emails, on the Web. This makes software and data equally accessible from home computers, public Internet cafés or smart phones. Google's cloud computing also makes damage to a hard drive less important.

According to a Wall Street Journal article, Google is expected to launch a service in 2010 that will let users store the contents of entire hard drives online. The company has not confirmed this plan, but Google already enables users to port personal and business data to the Internet and use the company's Web-based software. Google's Calendar organizes events, Picasa stores pictures, YouTube (now owned by GOOG) holds videos, Gmail stores emails, and Google Docs stores documents, spreadsheets and presentations.

Sales increased 9% during the 12 months ended 12/31/09 while earnings per share jumped 19%. We expect sales growth of 14% and EPS growth of 20% in 2010 and in future years. Google will continue to benefit from increasing Internet usage and the effectiveness of online advertising.

Google may cease operations in China because of cyber attacks on Google users and China's censorship of free speech. I believe the Chinese government will not back down, and Google will cease operations in China. The company, though, derives less than 1% of its revenues from China!

The recent decline in Google shares has created an outstanding buying opportunity for investors.  GOOG shares now sell at 24.8 times my 2010 earnings per share forecast of 23.50, which is low in comparison to the 20% EPS growth that we foresee during the next three to five years. Buy GOOG now.

Now on to Research in Motion (RIMM), a Canadian company and a leading manufacturer of wireless cell phones designed to handle voice and email communications. The company's BlackBerry smart phone has been the clear leader in the business (commercial) market since its introduction in 1999. Research in Motion has recently launched an effort to sell BlackBerries to casual (consumer) users, which has met great success. Sales to business users have been robust, as evidenced by solid sales and earnings growth during the recent recession.

One of Research in Motion's independent software vendors, Mezeo Software, now offers cloud storage to BlackBerry owners, which allows users to upload, access, view, and share files online from their BlackBerry smart phones.

Research in Motion commands 55% of the U.S. smart phone market, and the company maintains a strong balance sheet with $4.40 per share of cash. The company is in the enviable position of having plenty of cash to invest in new products to stay ahead of the competition.

New smart phone models, such as the Bold, the Curve and the Storm are selling very well. Aggressive expansion overseas, except China, is providing surprisingly strong growth, too. I expect consumers to opt for less expensive models, which will hamper total sales dollars, but aggressive promotions and new products will help Research in Motion gain additional market share.

Sales soared 51% and earnings per share jumped 23% during the 12 months ended 11/30/09. I expect sales and earnings growth to exceed 20% during the next 12 months, with EPS growth of 20% per year during the next five years. RIMM shares sell at a very modest 13.3 times my next 12-month EPS estimate of 4.79. RIMM pays no dividend. The stock is clearly undervalued and presents an outstanding investment opportunity.

Sincerely,

J. Royden Ward
For Cabot Wealth Advisory

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