Reports that the National Security Agency has been grabbing phone records and Internet caches for analysis aimed at catching terrorists has a lot of people spooked.
But can it impact your investments?
Public cloud, private paranoia
Corporations are individuals under the law, and like people they have secrets they don’t want known. So loading data onto public clouds would seem to make any paranoid CEO wake up sweating from a deep sleep. The largest public cloud provider, by a great distance, is Amazon.com, Inc. (NASDAQ:AMZN). Their cloud operates on a self-service basis, and the company does not break-out cloud revenues in its financial reports. Still, if there is a backlash, you will see it here first, in the June numbers due for release on July 25.
The most recent estimate for sales on Amazon.com, Inc. (NASDAQ:AMZN) Web Services is $3.8 billion for all of 2013. That figure could take a huge jump if IBM loses its protest of a $600 million, 10-year contract the CIA tried to sign with Amazon.com, Inc. (NASDAQ:AMZN) for it to build it a private cloud, essentially replicating one of its data centers.
This may be an instance where Amazon.com, Inc. (NASDAQ:AMZN) is wise to lose. Knowledge that Amazon.com, Inc. (NASDAQ:AMZN) is indeed working with the nation’s spy agencies is sure to set off alarm bells among major CEOs, in ways that knowledge of IBM working in the same way won’t, because Amazon.com, Inc. (NASDAQ:AMZN) has such a high profile in the public cloud.
Private cloud growth
Just as Amazon.com is hurt by the revelations, at least in terms of reputation, IBM may curiously benefit.
This goes beyond the possibility of its winning the CIA contract. IBM has embarked on a private cloud strategy, promising to build security and privacy into the clouds it builds for all manner of customers. Private cloud has not taken off as people assumed it would – the low prices of public cloud resources have trumped the privacy and security angles. But that could well be changing, as companies realize that anything in front of their firewalls is bound to be getting into someone’s hands they don’t want it getting into.
A firewall is more than a security scheme aimed at foiling hackers, after all. It’s also a front door. There is an assumption that law enforcement will, before it comes into a corporate front door through a firewall seeking data, knock first. And show a warrant.
While IBM has recently bought SoftLayer for $2 billion, a company that offers cloud infrastructure based on Citrix technology, it is far more committed to the OpenStack infrastructure first developed by NASA and now supported, in the public cloud sphere, by Rackspace and more generally by the Rackspace Foundation.
The problem for investors is that, while cloud is important, it’s not yet financially potent. Assuming the Amazon estimates are right and it will bring in almost $4 billion from cloud this year, that would still be less than 4% of its total revenues, not a game changer.
Look at Red Hat Inc (NYSE:RHT)
It’s for this reason that those who think the NSA scandal will have an impact in the cloud business should look first at Red Hat Inc (NYSE:RHT).
Red Hat Inc (NYSE:RHT) stock has come under pressure since it became apparent companies were slowing their move to private clouds in favor of Amazon.Com. Over the last year the stock is off 13%, but almost all of that has come since mid-May.
Red Hat Inc (NYSE:RHT) grew revenues by $50 million year-over-year in March, a nice rate of 17%, and it regularly brings about 15% of revenues to the bottom line. The company is now holding its annual customer conference in Boston, where it’s expected to focus on OpenShift, a cloud platform built on OpenStack it first announced last year.
OpenShift offers customers access to all the tools Red Hat Inc (NYSE:RHT) originally built for its Red Hat Enterprise Linux product, a favorite among data center operators for many years now. It represents a smooth glide path from Linux hosting centers directly into cloud, with some backward-compatibility for applications. Red Hat Inc (NYSE:RHT) doesn’t do its own hosting, it’s a software company, so if there is a move toward private clouds it is well-positioned to take advantage of that, and it should start showing up in its results.
So if you believe that the NSA revelations will have an impact on the cloud computing market, you may want to take some money off the table at Amazon and put some of that to work at Red Hat. Red Hat makes its next quarterly earnings release on June 19, so you may want to test this theory by looking at those numbers and, if they’re favorable, see this as a trend with legs and get in then.
Dana Blankenhorn owns shares of International Business Machines (NYSE:IBM). The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com and International Business Machines.. Dana is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article A Cloud Investor Strategy for the NSA Scandal originally appeared on Fool.com is written by Dana Blankenhorn.
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