There is a Great Cloud Squeeze taking place, even while the cloud market grows at an amazing rate.
At the same time, the public cloud is being consolidated by Amazon.com, Inc. (NASDAQ:AMZN), whose dominance in that sector, and whose unwillingness to take profits, is threatening everyone else in the space.
Let’s take these events one at a time, and see if there are some Foolish opportunities.
Amazon leads the public cloud squeeze
As Jason Bloomberg of ZapThink noted this week, computer vendors are facing an existential threat from Amazon.com and its Amazon Web Services, usually known as AWS, because Amazon doesn’t think like a computer vendor.
Amazon.com, Inc. (NASDAQ:AMZN) thinks like a merchant. While computer vendors would think that, if you invent a business you squeeze it for profits, as a merchant Amazon thinks that if you have an exclusive on the market, you take over the market before anything else. And cloud could be a trillion-dollar opportunity.
So long as investors applaud this attitude, and they are applauding it, to the point of giving Amazon’s retail revenue a valuation of price-to-sales that’s closer to the level of International Business Machines Corp. (NYSE:IBM) than retailers like Wal-Mart, Amazon.com, Inc. (NASDAQ:AMZN) is going to keep pressing its advantage, meaning regular price cuts will continue and rivals will keep getting squeezed.
Among those recently squeezed heavily was Rackspace Hosting, Inc. (NYSE:RAX), whose hosting services are based on the open source OpenStack, a system from NASA it pioneered as lead sponsor. Its stock fell out of bed, as I noted last month, and it has yet to recover.
But, as with Mark Twain, reports of Rackspace’s demise may be exaggerated, because of the other end of the cloud squeeze.
IBM creates a private cloud squeeze
That end is held up by IBM, which as I noted last week is now committing to OpenStack.
Rackspace benefits from this announcement because it has more committers delivering code to the OpenStack project than any other company. If you’re looking to support OpenStack, then, you will find more talent at Rackspace than anywhere else, even IBM. Its recent move down may be over-done.
International Business Machines Corp. (NYSE:IBM)’s move is drawing rave reviews but the company now faces the problem of delivering on its promises. IBM’s steady rise since its OpenStack announcement reflects the credibility the market has in the company meeting promises. But if you want real OpenStack credibility your choice should be Rackspace, not IBM. I wonder how long it will take the market to recognize this? It could make RAX a relative bargain.
VMware, Inc. (NYSE:VMW) suffers the squeeze
If IBM and Amazon.com are doing the squeezing, who is getting squeezed?
That would be VMware.
VMware, Inc. (NYSE:VMW) has long been the Amazon.com, Inc. (NASDAQ:AMZN) of the virtualization space with its vSphere hypervisor. But the success of Amazon in taking public cloud market share has encouraged VMware to respond, with rumors that it, too, will soon launch a public cloud.
Still, International Business Machines Corp. (NYSE:IBM)’s moves present a bigger threat. That’s because OpenStack uses KVM was its hypervisor, the software that builds virtual machines out of commodity parts. KVM is now a standard part of Linux, thanks to IBM’s alliance with Red Hat, Inc. (NYSE:RHT), and for VMware virtualization is the cash cow. Without that cash cow none of its other cloud moves get fed.
VMware management recently addressed all this with analysts. Shares were already down almost 20% after an earnings report that failed to meet expectations, yet that drop was not matched by one in EMC (NYSE:EMC), the storage company that spun-out VMware and still owns an 80% stake.
Thus, EMC may prove even more vulnerable to a cloud fall than VMware, Inc. (NYSE:VMW), since investors haven’t pulled out of it in the wake of VMware’s difficulties.
My view is IBM-centric
As you will note below, I hold shares in both IBM and Red Hat, the Linux vendor that has been its software partner in the move to OpenStack. My IBM shares have done well, but my Red Hat is currently underwater.
I expect that to continue for some time, but I fully expect Red Hat to eventually come good due to its IBM alliance. Still, International Business Machines Corp. (NYSE:IBM) is going to remain the safest place from which to play the cloud for some time. Everything else, including Amazon.com, Inc. (NASDAQ:AMZN) (only because of its price), will remain speculative, and I consider Rackspace to be fully-valued. I remain interested in investing in Amazon if its valuation becomes more reasonable, and consider anything below $230/share reasonable – that’s about $40/share below the current price.
But if you want to speculate, then bet in the near-term on VMware, Inc. (NYSE:VMW) because of strategist Paul Maritz, a former IBM executive. Something tells me he’s going to tell the analysts what they want to hear tomorrow, whether or not it works in the market. It may even be worth a few dollars on options, assuming this is mad money you’re prepared to lose.
Take profits, or take losses, quickly. Then keep your cloud powder dry. It’s going to be a wild ride from here.
The article Opportunities In The Great Cloud Squeeze originally appeared on Fool.com.
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