The cloud computing industry can be a little daunting. Every week there's a new start-up promising to be a Netflix for YouTube, or claiming to leverage the cloud for customer relationship algorithmic optimization. You know, marketing gibberish. What does it all mean? There may be a ton of companies in the cloud, but many may not survive, and a number of them are just full of hot air. Let's take a look at a few of the most promising stocks in the sector, and try to figure out why they've gotten this far.
Cloudy bona fides
A company doesn't merit being part of the cloud just because it's got something running on the Internet. But software as a service is easy enough to define. Whenever you have to access your application through a central location, and pay ongoing license fees to the developer, that's generally software as a service. Microsoft's Office suite is plain old software. Its Office 365, available through subscriptions, is software as a service. Got it? Cool. Let's check out some other top cloud software companies, and try to figure out if they're worth your money.
The digital rundown
I've picked out a rather motley group of companies that operate in the software-as-a-service market. This isn't an exhaustive list, but I hope it's a good starting point for your search. Here are a few quick bird's-eye stats to give you a tiny bit of context before diving in:
3-Year Revenue Growth
Trailing Year Profit Margin
Source: Yahoo! Finance and YCharts.
Some of these companies might well be much better choices than the others. NetSuite, despite solid growth, has yet to be profitable. Salesforce clings to its profit margin by a thread. Akamai may not really be a software-as-a-service company at all. Here's what each brings to the table.
Salesforce had to make this list. It is one of the original cloud computing companies, and CEO Marc Benioff is one of the medium's greatest evangelists. Many of its offerings are built on client relationship management, or CRM, hence its ticker. Fellow Fool Tim Beyers points out that Salesforce is leading the industry in pushing for more social integration. Now, if only it could somehow justify that valuation.
Akamai isn't known as a provider of cloud applications, but its services fit the description. The company uses a massive server infrastructure (almost 100,000 of them) to help businesses manage their data streams. I debated labeling Akamai a cloud platform instead of a software provider, but since the company has done almost all the development legwork for its clients, it makes more sense to term it software as a service. In reality, Akamai is really more cloud service than cloud software, but acquiring Israeli start-up Contendo might push it toward the latter category.
Oracle and SAP have both been buying their way into the cloud software market. Oracle went after RightNow Technologies last October to combat Salesforce's social push. SAP gobbled up unprofitable cloud business-solutions company SuccessFactors shortly afterward. Both companies throw off enough cash to make inroads against Salesforce, but it takes more than big buys to make big waves. The customers have to want the software.
Oracle CEO Larry Ellison may not want to compete much with NetSuite; he does own a pretty big chunk of the company. NetSuite looks better than SuccessFactors, though Tim doesn't think it's better than Salesforce. Is there room in cloud software for a quiet middle child? Customers appear to think so, as revenue growth trails only one company on the list. Guess who.
Everyone knows Cisco for its networking solutions, and that alone might earn it a spot in many "top cloud computing" lists. But Cisco's been quietly and persistently moving into the cloud over the past few years. Its WebEx offers cloud conferencing services, it bought a cloud security provider in 2009, and it also has a partnership with VMware and EMC to push bundled cloud solutions.
Cisco's even lent its weight to an open-source cloud networking protocol. This might seem counterproductive for the world's largest networking company, unless its support accomplishes the desired goal of kneecapping proprietary competitors. At the very least, Cisco might be attractive due to the need for more connectivity as the world makes more use of the cloud.
Foolish final thoughts
There are cloud software companies that were left off my list, and more will be founded in the next few years. It would be impossible to give them all a fair shake in one article, but it represents a starting point. As with any technology stock, it always pays to know more. Don't stop learning here. There are plenty of resources at your fingertips.
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