David Evanson and Oliver Pursche
Minyanville.com, Summer, 2012
People like to complain about our country. And as much as I am a glass-half-full type, I do admit there’s certainly a lot to complain about — from schools and the lagging test scores, to polarizing politics, and the frightening slice of our GDP consumed by health care.
But somehow, we always come out on top. Why? Because we are often at the forefront of game-changing technology. From agricultural equipment in the 19th century, to the space race of the zz60s, to the Internet, to social media, and now to the next giant in our midst where America has a significant lead: cloud computing.
Here’s a good baseline number: By some estimates, cloud computing will generate as much as $1.1 trillion a year in revenue by 2015. This is about twice the size of the US auto industry. According to a recent IDC study, these monies will likely be reinvested to grow the burgeoning sector and create nearly 14 million new jobs. While mobility and social media will play a big role in the growth of cloud computing, it will be our endless desire for more video and other “heavy duty” content that will drive one of the largest segments of cloud computing: data storage.
According to the IDC study, the United States may gain as many as 1.1 million of these jobs. But for investors, the news is even better: The leading companies in cloud computing are all right here in the good ‘ol U.S. of A.
As I’ve written many times, companies that are at the forefront of innovation and new technologies tend to have a significantly higher return than the market average (this applies across the board, not just to tech companies). VMware (VMW) and Citrix Systems (CTXS) are two of the smaller and more aggressive names in the space, but don’t overlook some of the more familiar large-cap stocks. Companies like IBM (IBM), Microsoft (MSFT), and Apple (AAPL) are all growing their cloud businesses. On a broad-brush level, according to Thomson Reuters, the leading global innovators (as compiled in their annual Top 100 Global Innovators survey), outperformed the S&P 500 in market cap gains by a lot: 12.9% vs. 7.2%, respectively:
What I’ve observed about innovative companies is the following:
They gain market share, not by cutting costs, but by offering a better, more compelling product than their competition. They adapt their strategies to different markets and different economic environments, often choosing flexibility over efficiency. They are restless. Management is always striving to come up with newer, better products.
Given the recent, and most likely continued market volatility, patient investors looking for a big win over the next decade should consider these. As we enter earnings season, pay careful attention to which business segments are growing fastest, and whether or not one of these companies is gaining a significant amount of market share.