There is a gamut of companies operating in the cloud computing space, including the likes of Citrix Systems, Inc. (NASDAQ:CTXS), Rackspace Hosting, Inc. (NYSE:RAX), Red Hat, Inc. (NYSE:RHT), salesforce.com, inc. (NYSE:CRM), Cisco Systems, Inc. (NASDAQ:CSCO), Juniper Networks, Inc. (NYSE:JNPR), VMware, Inc. (NYSE:VMW), EMC Corporation (NYSE:EMC), International Business Machines Corp. (NYSE:IBM), Oracle Corporation (NASDAQ:ORCL) and Microsoft Corporation (NASDAQ:MSFT), just to name a few that have a hand in the cloud computing cookie jar.
Question is, which will pull out the biggest cookie? There are three key types of primary cloud computing, including Software-as-a-Service (SaaS), Platform-as-a-Service (PaaS) and Infrastructure-as-a-Service (IaaS).
It appears that the IaaS sector will be getting the larger slice of the proverbial pie over the interim. Gartner expects this segment (IaaS) to grow at a five year compounded annual growth rate of 41%, compared to 27.7% for PaaS and only 19.5% for SaaS.
IaaS is a bit more robust and is a greater form of network optimization and outsourcing, where I agree with Gartner that IaaS will be the ultimate desired endpoint by a majority of enterprises, allowing them to fully outsource infrastructure and leading to lower upfront and servicing costs.
SaaS includes the likes of major CRM player salesforce.com, inc. (NYSE:CRM); PasS has major players Microsoft Corporation (NASDAQ:MSFT), International Business Machines Corp. (NYSE:IBM) and Google Inc (NASDAQ:GOOG) offering key products. So what are the best ways to play the fastest growing IaaS market? Major IaaS platforms include Rackspace Hosting, Inc. (NYSE:RAX) and Oracle Corporation (NASDAQ:ORCL).
Rackspace Hosting, Inc. (NYSE:RAX) offers Rackspace Cloud and Oracle offers Oracle Infrastructure as a Service. Oracle has also been snatching up a number of other cloud and SaaS companies to expand its offerings in the sector. This includes acquiring RightNow, Taleo and Eloqua in 2012.
Oracle managed to only miss earnings last quarter by $0.01, but was down over 7.5%, making the stock even more undervalued and creating a great buying opportunity. Oracle also calls value investor Seth Klarman one of its top investors, with over 11% of his Baupost Group hedge fund invested in the company at the end of 2012 (check out Klarman’s newest picks).
Rackspace Hosting, Inc. (NYSE:RAX) provides hosting solutions, including information technology (IT) as a service, managing web-based IT systems for small and medium-sized businesses, as well as large enterprises.
Rackspace Hosting, Inc. (NYSE:RAX) managed to post EPS of $0.21 in the fourth quarter, compared to $0.18 for the same quarter last year, but still coming in below consensus of $0.22. After the earnings miss, Stifel Nicholas downgraded the company to a hold, citing that the growth deceleration for 2013 appears more significant than expected. Hedge funds have turned bearish on the stock of late, with the number of hedge funds owning the stock declining by 19% from the third quarter to fourth quarter of 2012.
Other Cloud Plays
As with any industry, there are a number of components that go into making a final product. For example, although GM and Ford “make” cars, there are tons of OEMs (original equipment manufacturers) that supply these parts, including the likes of Lear and Delphi.
Other widely talked about “cloud” companies, Red Hat, Inc. (NYSE:RHT) and VMware, Inc. (NYSE:VMW) are just parts of the bigger cloud computing puzzle, operating in the virtualization space. Virtualization is one way that the cloud can be delivered, where cloud computing is an approach to delivering services.
EMC Corporation (NYSE:EMC) is one of the world’s largest suppliers of enterprise storage systems. Coincidentally, it also owns 80% of VMWare, the largest provider of server virtualization software. EMC focuses on data storage solutions for enterprises and government entities around the world. Its products are used in conjunction with a variety of computing platforms that support key business processes.
EMC has Brookside Capital, managed by Bain Capital, as its largest hedge fund shareholder, with a $204 million position in the stock comprising 4.6% of its 13F portfolio, but other hedgies are bearish on the stock (see which ones).
Red Hat provides open source software solutions to the enterprise, namely offering operating systems and virtualization options for mainframes and server applications. Red Hat saw sales lower than expected last quarter after several large deals failed to close, coupled with weakness in Europe.
After the earnings announcement Raymond James downgraded the company to market-outperform, citing the company’s below expectations guidance as setting the stage for potential future lowered guidance (next year).
For those looking to dapple in the virtualization market, VMWare and parent EMC both hold positions in two of the most demanded types of virtual storage preferences.
Source: Gartner
VMware has a dominant position in the server virtualization market from software-defined data centers, hybrid cloud and client management of mobile devices. The company estimates that these three market segments will grow at a compound annual growth rate of 20% for the next four years.
Yet, Red Hat, EMC and VMware are just pieces of the puzzle, proving virtualization solutions from the desktop to the data center. Their solutions enable organizations to aggregate multiple servers, storage infrastructure and networks together; however, for those looking to play the complete cloud industry, Oracle might be your best choice.
Don’t Be Fooled
The only variant view that I’d mention when comparing Rackspace and Oracle is that Rackspace is a purer play in the cloud space, whereas Oracle operates various segments. Everything else points in Oracle’s favor. Rackspace trades at 65 times earnings and Oracle only 15 times; meanwhile, Oracle also has an EBITDA margin that’s more than 1,500 basis points higher than Rackspace and a return on investment of 17%, compared to Rackspace’s 11%.
As far as cloud spending, it appears that emerging markets and Asia-Pacific will offer investors the best growth opportunities…
…so which company has the most exposure to these areas? Oracle derives around 50% of revenues from Europe, the Middle East and Africa, and Asia-Pacific, where only about 25% of Rackspace’s revenues are derived from outside the U.S.
If you want to play just part of the cloud market, EMC (and its subsidiary VMWare) offer solid growth prospects in the virtualization and storage markets; however, if you’re looking to play the fastest growing cloud segment Oracle is a solid bet.
The article Get Your Head in the Cloud originally appeared on Fool.com and is written by Marshall Hargrave.
