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The Hardware Winners of a Cloud-Computing Boom

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Without hardware, there would be no cloud. But cloud-centric hardware isn't always the same as the box you use to surf the Web. Maintaining constant uptime, speedy data transfers, and always-on connectivity aren't optional when providing service to thousands of demanding businesses.

I've put together a list of some cloud-serving hardware manufacturers that might be worth your time. You'll find a few familiar faces (paired with some not-so-familiar numbers), and you might be surprised by who's taking the pole position in this explosive market.

The processor king
Intel (Nasdaq: INTC  ) is one company that's virtually guaranteed to ride the growth of cloud computing. It commands a monopolistic share of the processor market, and it's making inroads to solid-state drives as well. An investment in Intel -- as you'll see by following the link -- is an investment in computing, period.

A few quick stats regarding Intel's dominance:

  • Server processor market share: 95.1%.
  • Net margin: 25%.
  • Research and development: $7.7 billion annually, 15% of revenue.
  • Five-year revenue growth: 57%.

There are always competitive risks, but Intel won't need a 95% market share to continue growing as more activity moves to the cloud.

The storage rumble
Intel's processor dominance makes that segment seem dull, but there's a major battle brewing in the storage hardware industry. On one side, hard-disk manufacturers Western Digital and Seagate (Nasdaq: STX  ) control more than 60% of their spinning-media market. On the other side, solid-state drives from much smaller companies are absolutely trouncing their old-school competition in transfer speed, an all-important consideration when delivering a lot of data.

SSDs might be faster, but they sure cost a lot more. That pocketbook pinch is driving server (and PC) manufacturers to make their own SSDs, according to iSuppli research conducted last year. For many large-scale manufacturers, it just makes more sense to buy the flash memory to build their own drives. That's bad news for third-party SSD manufacturers such as SanDisk and OCZ Technology (Nasdaq: OCZ  ) , but it could be a big opportunity for memory-chip makers.

The report pointed out Micron (Nasdaq: MU  ) as one big benefactor of this trend, but Samsung has more than twice the flash memory market share. Intel, as I pointed out earlier, is also moving into SSDs. Western Digital bought its way into the SSD market in 2009, but it may be at a disadvantage without chipmaking capabilities of its own.

A few quick storage stats:

  • Western Digital first-half 2011 shipments: 103.6 million drives.
  • Seagate first-half 2011 shipments: 101 million drives.
  • Combined Western Digital and Seagate market share: 63.5%.
  • Combined Western Digital and Seagate 2011 revenue: $20.4 billion.
  • Expected SSD revenues (all manufacturers) in 2011: $4.4 billion.
  • Projected SSD revenues in 2014: $7.2 billion.

The box builders
That takes care of processors, storage, and memory chips. What about the companies that put it all together? As with hard drives, it's pretty lonely at the top. IBM and Hewlett-Packard (NYSE: HPQ  ) dominated in 2011, with each shipping about 30% of servers worldwide. Not every server gets used by the cloud, of course, and some providers may choose custom-built alternatives.

Neither IBM nor HP is known as a "server company," but both are still good cloud plays thanks to their cloud presence. IBM is perhaps the only company to operate throughout the three layers of cloud computing, offering both computing capacity and software as a service as well as servers.

To keep your eye on these companies, add them to your Watchlist now. Looking for more information on this incredible opportunity? The Motley Fool's put together a free report on the cloud computing phenomenon that can tell you more about where it is and just how much money is at stake. There are hundreds of companies trying to capitalize on the cloud, but we've found some of the best. You can find out more today -- reserve your free copy of this important report while it lasts.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter for more news and insights. The Motley Fool owns shares of Western Digital, IBM, and Intel. Motley Fool newsletter services have recommended buying shares of Intel. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (6)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 05, 2012, at 3:13 AM, winklerf wrote:

    SSDs don't absolutely trounce spinning disks in transfer speed. They are definitely starting to show nice advantages in that arena, but the area where they thoroughly dominate is access time, which is the amount of time it takes to locate data. This is their primary selling point for desktops, but might not be so clearly useful for servers. That will depend upon how much disk time each operation requires. If the amount of time is relatively large, then it won't matter. However, there is no question that SSDs have the ability to be designed with a much more parallel I/O than spinning disks since they aren't constrained by platters.

    Sandisk is not much of a direct player in SSDs and Micron is actually a bigger player than they are in self branded drives. I believe Sandisk does most of its business imbedded in products that contain flash memory like music players and tablets rather than in SSDs, particularly high end SLC flash for servers. Further, Intel is one of the biggest players in SSDs, particularly those designed for servers.

    As for who might be the most interesting company to watch in the land of SSDs, the memory controller designers are far more interesting than the commodity flash manufacturers. In this space an upstart, Sandforce (now owned by LSI), has made a lot of waves. They design the controllers that OCZ and many others use. They make what are considered the fastest controllers on the market. However, there have been some concerns about their reliability, which is probably why you won't find a Sandforce/LSI controller in Intel products for servers, nor in the servers assembled by companies that tout reliability. A controller that is reliable and pretty fast and is used by Micron in their SSDs in designed by Marvell.

    The biggest problem for SSDs in servers is that it is more complex to manage. This is because flash cells wear out relatively quickly, so you can't just keep writing to them over and over. As a result, more careful management of the bits that currently contain data, those that have been "erased" and spreading the load of re-writes is necessary. Further, memory controllers take on the task of encryption and compression to secure data and transfer it faster. This makes for a very complex process that can be unreliable, especially when you go all out for performance like Sandforce does. SSDs have software updates to fix bugs in their memory management and improve performance relatively regularly. This is because they are far more complex than a regular spinning disk drive.

    At the end of the day, I'm not so sure that servers are a big chunk of the flash business since the high end notebook, as well as smartphone and tablet markets consume a ridiculous quantity of flash. As a result, I can't see this business moving the needle for a company that produces the flash like Micron, Samsung, Sandisk or Intel. The only companies that might see a significant bump will be some of the small companies that design controllers like Marvell or LSI.

  • Report this Comment On February 05, 2012, at 4:00 PM, XMFBiggles wrote:

    @ fidgewinkle -

    Thanks for the explanation! It goes a long way towards building a better understanding of the SSD market. Please don't hesitate to call me out in the future, in the event that I misrepresent a different sort of hardware. I try not to, but no one is perfect.

    - Alex

  • Report this Comment On February 06, 2012, at 1:44 PM, winklerf wrote:

    This article about Intel developing a more reliable SSD with a Sandforce controller came up on Anandtech, which changes the landscape quite a bit.

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