Cloud computing is changing the way businesses view their entire information technology (IT) infrastructures. Cloud computing is being adopted by big and small companies at a very rapid pace and its growth is projected to continue well into the next decade -- and beyond.

Cloud computing stocks are a segment of the application software sector and they stand to have an increasingly important impact on people's lives. They will also be one of the main beneficiaries of emerging technologies like Autonomous Vehicles (both cars and drones), Augmented Reality/Virtual Reality (AR/VR), Artificial Intelligence (AI), 5G Networks, the internet of Things (IoT), Blockchain Security, and Robotics. That's why investors looking to build long-term wealth should consider cloud computing stocks.

A group of laptops encircling a cloud

Image Source: Getty Images.

What is the cloud and how is it like the internet?

To better understand just what the cloud is, let's compare it to the world wide web. After all, the cloud is a natural extension of the internet. The internet is a nebulous entity connected to your PC (smart phone, tablet, laptop, personal voice assistant, or whatever). You perform a query by typing a search phrase into a browser (or asking that obelisk on the coffee table a question) and presto, you get an answer. But, from where does that response originate? Let's pull back the curtain and see how the cloud plays into this seemingly magical process.

Internet search results come from interconnected networks around the globe. So, in its simplest definition, the internet really is just a bunch of intentionally connected devices. This is where the cloud comes in. It too is simply a connection between a network and an end user. The difference is that the connection is just between the cloud provider and a client. Where the internet is a crowd, the cloud is just a pair. The mechanism used to make this connection and share information is still the internet.

The cloud is a service, not a thing

The cloud is essentially a bunch of huge private data centers that "lease" computer resources to clients. Some of those clients are businesses and some are regular folks like you and me. The resources included in the lease depend on what you're trying to accomplish and are defined as services. They fall into one of three primary offerings:

  • Infrastructure as a Service -- IaaS
  • Platform as a Service -- PaaS
  • Software as a Service -- SaaS

The most complicated cloud offering is Infrastructure as a Service, or IaaS. IaaS is the offsite outsourced delivery of all things computer related. In simplest terms, IaaS providers offer clients an entire IT department. The important feature is that it is delivered virtually over the internet. The IaaS provider replicates every aspect of the client's network -- its entire physical infrastructure. So, for example, if a given client's IT infrastructure consists of hundreds of servers, they would all be located at the IaaS provider's location. On the client end of the connection is a visual representation of how the network is configured and what it's doing. So, what an IT professional sees on a desktop monitor is exactly what would be presented if all of that "infrastructure" was in the same office where he or she was sitting. 

The IaaS provider owns the physical hardware; the building to house it; the air conditioning to keep those whirling machines cool; and, employs the actual human beings to configure, monitor, and debug the boxes. They supply all the sophisticated software to run the hubs, servers, switches, and modems and make sure that all those gadgets talk to, and share data with, each other without interruption. They re-balance loads on the fly so that there's no latency or downtime when the client needs to crunch a gazillion numbers in some intricate algorithm or save several terabytes of information to memory.

The next level of service that cloud providers offer is akin to outsourced middleware. Middleware is the glue that holds a network together. It's all the back end stuff that takes a software developer away from developing software. This includes configuring and provisioning servers to free up memory and processing power to create, test, and debug new programs and applications that are specific to a company's data processing requirements or business intelligence objectives.

Offloading these ancillary distractions to a cloud provider that offers a Platform as a Service or "PaaS " package gives the client's engineers and software developers the time they need to write the code that has a positive economic impact on the company's operations.

The third service that cloud providers deliver to clients is the most straightforward. It's providing software to customers virtually without the program being saved onto a local network or home PC. This is Software as a Service or "SaaS" and you're probably already using it -- think Dropbox (DBX -0.96%) or Alphabet's (GOOGL 1.08%) (GOOG 1.06%) Google Docs. Both are SaaS offerings.

Here's the value proposition of cloud providers.

Cloud providers offer these services (IaaS, PaaS, SaaS) in any combination on an à la carte basis that allows clients to pay for only what they use, either memory (bandwidth, etc.) or processing (known as "compute", CPU, etc.). And all of it is delivered to the client's PC via a web browser -- just like the internet! This frees up enormous resources.

Companies don't have to pay rent, property taxes, or utilities on buildings that house data centers. They don't have to invest in racks or the equipment that sits in them. They don't have any repair or maintenance or replacement costs. They don't have to hire engineers to design intricate networks. They don't have to employ back end programmers to keep the systems up and running. This can slash about 35% off the annual cost of a company's IT expenses. And it allows a company to focus its IT efforts on creating code that is essential to improving processes and delivering products or services to customers. It is the 21st century version of the "make or buy" decision, creating huge cost savings, and representing a compelling shift in IT spending.

The growth potential of the cloud is huge

As the table below illustrates, the shift to cloud computing has massive growth potential. According to various research firms' projections, the cloud computing market is estimated to be larger than $696 billion by 2025. Bear in mind that the current market is right around $200 billion. So, you're looking at a compound annual growth rate (CAGR) of better than 21%.

Organic growth of the cloud computing market

Data Sources: Adroit Market Research, IDC, Gartner. Image created by author.

Much of this growth will come organically as companies large and small migrate their IT environments to the cloud. That growth doesn't include any of the whiz bang techno stuff I mentioned before. Pick any one of them. Each is a memory-intensive, compute-intensive endeavor. They're going to require huge data centers with enormous processing power to pull off. This is exactly what the cloud was made for -- and exactly why cloud computing will be a major investment theme for the next decade and beyond!

Stocks to watch as this unfolds include Amazon (AMZN 0.58%), the undisputed leader in Iaas, MongoDB (MDB 0.24%), which provides a disruptive open-source database platform for developers, and the company that pioneers Saas, Salesforce (CRM 0.33%)