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Investing in Edge Computing Stocks

Updated: March 22, 2021, 8:07 p.m.

Cloud computing stocks were top performers during the 2010s, but a new trend is emerging for the next decade ahead: edge computing. While cloud computing houses data and software services in a centralized data center and delivers to end users via the internet, edge computing moves data and software out of the cloud to be located closer to the end user.

Edge computing reduces the time it takes to receive information (the latency) and decreases the amount of traffic traveling across the internet's not-unlimited infrastructure. Businesses that want to increase the performances of their networks for employees, customers, and smart devices can take advantage of edge computing to bring their apps out of the cloud and host them on-site either by owning and using networking hardware or paying for hosting at localized data centers.

Edge computing is expected to be a double-digit growth industry in the 2020s as new technology such as artificial intelligence (AI) and 5G mobile networks expands and trends such as remote work and e-commerce pick up momentum in the wake of the pandemic. The best edge computing companies are helping to build and manage relatively small, localized data centers that enable these trends.

Top edge computing stocks

The best edge computing stocks companies are sorted and described below:

Public cloud computing giants

It's important to remember that, in many ways, edge computing is still an extension of the cloud. As such, some familiar names are playing key roles in the expansion of edge networks. For investors who want broad exposure to this emerging trend with less risk than is associated with a small-cap, pure-play edge computing company, these stocks are a good place to start.

1. Amazon (NASDAQ:AMZN), 2. Microsoft (NASDAQ:MSFT), and 3. Alphabet (NASDAQ:GOOGL)(NASDAQ:GOOG) – All three of these tech giants' cloud offerings -- Amazon Web Services, Microsoft Azure, and Google Cloud -- support edge computing in both hardware and software. This is significant because tech researcher Gartner (NYSE:IT) thinks that some 75% of all enterprise data will be computed at networks' edges by 2025, compared to just 10% in 2018. As organizations increasingly start to pull data out of the cloud and adopt edge computing, the three public cloud leaders will already be positioned to provide solutions.

Granted, Amazon, Microsoft, and Alphabet are not pure plays in the cloud computing industry. Nevertheless, cloud computing -- and edge computing, by extension -- is a top-performing segment for each that is generating meaningful profits. When looking to invest in edge computing, buying the stocks of any of these three companies is a good place to start.

4. IBM (NYSE:IBM) – Of notable mention in the edge computing space is IBM. The company has struggled in the past decade as the tech giant’s legacy operations have dragged down its fast-growing cloud computing segment. However, IBM will be spinning off a sizable portion of its legacy business (specifically, its managed infrastructure segment into a yet-to-be-named independent entity) by the end of 2021 to narrow its focus on the cloud and edge computing. Post-spinoff, IBM will be one of the tech giants most focused there.

As part of its “hybrid cloud” strategy, IBM is hyper-focused on migrating computing power from the cloud to the edge. The company may not typically belong on the same list with Amazon, Microsoft, and Google, but edge computing could be the company’s entry point to regaining a leadership position in tech in the decade ahead.

Edge computing hardware

1. NVIDIA (NASDAQ:NVDA) – Semiconductor companies are designing new chips and equipment to enable the fast (faster than for the cloud) computing power needed for many edge network applications such as AI, connected and autonomous machines, and augmented and virtual reality. In this department, few companies are investing more in research and development than NVIDIA.

The company’s graphics processing units (GPUs) are already being put in centralized, cloud-based data centers as computing accelerators, and, in early 2020, NVIDIA acquired high-speed networking equipment outfit Mellanox to complement its super-fast data-crunching units. But NVIDIA envisions applying its GPU technology beyond centralized locations. It’s in the process of acquiring ARM Holdings, a leading licensor of chip designs used in billions of distributed devices like smartphones. NVIDIA wants to outfit ARM with its edge computing-enabled AI in order to put high-end computing power directly in user devices and distribute edge technology throughout the internet’s infrastructure.

NVIDIA has already had early success getting its GPUs into the cloud, and it’s also making fast progress with bringing next-gen edge computing applications into reality. When it comes to a nuts-and-bolts investment in edge computing networks, NVIDIA should be top of mind.

2. Arista Networks (NYSE:ANET) – This network equipment designer began as a pioneer in software-driven cloud computing equipment for the public cloud giants, and now it’s turning its attention to what it calls “campus cloud” -- smaller data centers for organizations’ private uses. This extension of cloud computing at a localized level was more than a $100 million edge computing business for Arista in its first year, a segment the company thinks could double a couple times over in the next 10 years.

Besides hardware for edge computing, Arista has an extensive portfolio of infrastructure software for management of local networks enabled by edge computing. Security for these new computing networks is a top priority, so Arista made a couple of acquisitions in 2020 to complement its existing suite of services and strengthen its lead in building the networking infrastructure of the future.

Content delivery networks

Content delivery networks (CDNs) are responsible for moving and securing data between parties. These internet infrastructure companies manage the flow of information online and therefore play an important role in migrating data from the cloud to the edge.

1. Akamai (NASDAQ:AKAM) – Akamai is the largest CDN in the world, enabling the movement of as much as 30% of all data traveling on the internet. The company has been around since the dot-com era and has been growing at a steady pace as the level of traffic on the internet steadily increases every year.

As a leader in managing the very infrastructure that enables the web, it’s not surprising that Akamai is betting on edge computing. As moving internet infrastructure and operations close to where users actually are becomes the norm, Akamai’s network performance and security platforms are evolving, too. This isn’t the fastest-growing name around, but for a steady bet on the continual evolution of the internet, Akamai is a solid pick.

2. Fastly (NYSE:FSLY) – Akamai isn’t alone in managing web traffic, though. As the internet was intended to be a distributed network of data, it accommodates many network traffic facilitators. Some newcomers in the CDN realm are promising, including Fastly, which completed its IPO in 2019 and has been growing rapidly ever since.

Fastly is a software-based edge network that is purpose-built for the next era in data management. The company helps publishers, online retailers, financial service firms, and the like to quickly deploy websites and apps close to their consumers to improve performance. Security is built into its CDN to help keep data secure as it makes its way to the end user. The company hit a speed bump in 2020 when its largest customer -- China-based social media app TikTok -- got embroiled in trade war issues. Fastly nevertheless remains a top next-gen CDN that is helping to bring photos, videos, and apps to the edge for its customers.

3. Cloudflare (NYSE:NET) – Similarly, Cloudflare is a software-based CDN operating at the network edge. It offers myriad security products and development tools for software engineers and web developers. Like Fastly, the company also completed its IPO in 2019.

Cloudflare has gained hundreds of thousands of users with a unique go-to-market strategy: It launches a new product for free (with paid premium features) to acquire lots of individual and small business customers and then markets its new product to paying enterprise customers. Cloudflare has created a massive ecosystem that it can leverage to land new deals and later expand on those relationships. It’s what makes this company a top edge computing pick since businesses and developers continue to flock to the next-gen edge network platform.

Edge network ETFs

For those not interested in picking individual stocks in the growing edge computing industry, ETFs, or exchange-traded funds, are also an option. However, many still view edge computing as an extension of the cloud, so an investment in any of these ETFs won’t be a pure play on edge networks. Rather, broader-based cloud ETFs are currently the only option.

1. First Trust Cloud Computing ETF (NASDAQ:SKYY) – This fund is the largest cloud computing ETF. It was launched in 2011 and has about $7 billion in assets under management. The fund is composed of 64 stocks -- inclusive of all of the ones mentioned above -- as well as numerous software companies (like those focused on cybersecurity) that are important aspects of edge networks. This ETF has an annual expense ratio of 0.6% (costing $6 a year for every $1,000 invested).

2. Global X Cloud Computing ETF (NASDAQ:CLOU) – Also notable is the Global X Cloud Computing ETF. It's a relative newcomer, having launched in early 2019, and thus has less than $2 billion in assets under management. It’s also relatively concentrated, holding just 36 stocks. Not all of the stocks mentioned above are included in Global X’s ETF as it is more focused on cloud software, but it nevertheless yields exposure to edge computing because many of its cloud companies are migrating there with customers. The Global X Cloud Computing ETF has an annual expense ratio of 0.68%, but it has outperformed First Trust’s ETF since it made its debut.

3. ARK Next Generation Internet ETF (NYSEMKT:ARKW) – If an actively managed fund -- one for which the investment holdings are not tied to an index -- is what you’re after, then the ARK Next Generation Internet ETF may be right for you. It was launched in 2014 and has accumulated more than $5 billion in assets under management. It has a relatively high annual expense ratio (0.79%), but ARK’s investment team has handily bested the returns of its peers. This fund’s goal is to invest in rising internet trends and companies that use the web to deliver services, so it may not have or maintain a focus on edge computing. Nevertheless, if the network edge does expand as it is expected to, then edge computing will be a prominent theme within the ARK Next Generation Internet ETF, making this a top fund to gain exposure to the sector.

Edge computing is a long-term play

Edge computing is a long-term investment theme that springs from the massive cloud-computing industry and is expected to outpace overall cloud growth in the coming years. It’s an emerging trend, so expect to see new companies and potential IPOs in this space popping up in the years ahead.

As is usually the case with high-growth stocks, though, investing in edge computing companies is prone to volatility. Share prices of the smallest and fastest-growing companies will always be volatile. But this is a long-term trend, so stay focused on the potential for the edge computing market years in the future as internet use continues to evolve and grow.

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