Investing In The Next Big Boom… “The Cloud”

By John Carter, vice chairman, Carter

It seems everywhere you turn these days someone is talking about the “almighty cloud” and cloud computing. It’s supposed to make our lives simpler, devices smaller and computing faster. For folks who do not know what the cloud is, it may be easy to dismiss it as simply a fad. But having a deep understanding of what actually powers the cloud, I can tell you we are in the beginning stages of a major shift in how we use computers to access and store data and information of all types.  

What Is The Cloud?

Cloud Computing So what is the cloud? Is it really a magical device in the sky? No, cloud computing refers to the use, access and storage of information and software via the internet. Today, your personal desktop computer holds all your software programs and stores all your data on its hard drive. For businesses, the PC may be connected to a server that provides back-up and storage and is often located on-site. With cloud computing, both businesses and individuals use the internet to access data and software, and store data on servers located in data centers that can be hundreds or even thousands of miles away. 

The cloud is a series of data centers full of powerful computer servers and equipment that takes software and data storage away from your desktop and out of your homes and offices and puts it in one or more offsite data centers. Let’s use digital photographs as an example. After I take a bunch of pictures on my camera, I jump on my computer and upload all my pictures to KodakGallery.com. I can then edit my pictures, buy prints and frames, create photo books, share my album with friends, etc. In this instance, I am using the cloud.  The photos are not stored on my computer’s hard drive. They are stored in a data center, on a server, owned by KodakGallery. I can access those photos from my PC at home, from my computer at work or even from my mobile phone – anywhere in the world – that’s cloud computing. 

Cloud Computing Growth

Cloud computing is one of the fastest growing sectors of our economy. In fact according to Forrester Research, annual spending by companies on cloud computing is expected to grow from an estimated $18.6 billion last year to $227.0 billion by 2020. That’s a compound annual growth rate of 28%. I am not aware of any other sector of our economy with such attractive growth prospects. 

Investing In The Cloud Through Data Centers

You can certainly try to capitalize on the growth potential of this market sector by picking stocks and trying to determine who will be a winner in the cloud computing boom. But why not take a different approach. Rather than picking stocks, consider a vehicle that allows you to participate in the growth potential of the cloud, but without the volatility of the stock market. I’m talking about investing in the overall infrastructure of the cloud itself – the data center real estate that houses the servers and provides the power and connectivity to keep the cloud running. According to an IDC report, the amount of global information is expected to increase 44-fold in the next decade and data requirements are growing at an annual rate of 60%. Simply put, we are creating data and information faster than we can store it. In fact, The Berkley School of Management published a report stating that more data was created in the last three years than in the entire human history. Data centers play a critical role as the heart and soul in maintaining critical information for businesses and organizations around the globe. 

Cloud Computing Relies on Data Centers

You may not realize it, but you are likely using data centers every single day without even knowing it.  From making hotel and airline reservations online, to searching for recipes and news articles, to sending emails and text messages, data centers affect how we live, work and play on a daily basis. Below are just a few more examples of how cloud computing relies upon data centers 24 hours a day, 7 days a week, 365 days a year.  

  • Have you ever streamed NetFlix movies to your PC or television?  Those movies are stored in data centers and are delivered with high-speed equipment and connectivity. In fact, according to a report from software provider Sandvine, Netflix accounts for roughly 20% of all internet traffic on any given night between 8pm and 10pm. 
  • Been to the doctor lately? By 2015, hospitals and doctors will be required to convert all medical records to electronic format. That will likely continue to create a huge need for data storage and data centers. It just so happens that one organization I am affiliated with just purchased a $29 million data center where the tenant is a $9 billion health organization. As one of the country’s largest healthcare systems, they are already planning for this mandate as well as future data storage requirements. 
  • Do you or your kids use Facebook to post messages and videos and chat with friends? Those profiles, pictures, videos and back and forth discussions among Facebook’s 750 million users reside in data centers.
  • YouTube states that there are over 3 billion (yes, billion) videos viewed each day on its website.  It takes a lot of servers, data centers and high-speed connectivity equipment to store and stream all those video files.
  • And what about music and smart phone apps? According to a DataCenterKnowledge.com article, Apple customers have downloaded more than 6 billion songs from the iTunes store and more than 1 billion apps from the app store. It’s no coincidence Apple is under construction on its state of the art $1 billion data center. 

Considering the staggering demand drivers that are likely to fuel cloud computing and data center growth over the next decade, it makes sense to explore where an investment in this market sector may be suitable for you. I am partial to investing in real estate due to the income it can provide as well as its lack of correlation to traditional investment vehicles which can result in greater diversification of my investment portfolio. In addition, a large portion of my portfolio is already invested in the market and by investing in data center real estate I can gain exposure to a high-growth market sector without taking on the volatility of the stock market. Also, as an added benefit, because real estate is a “hard asset” it can act as a hedge against inflation. Considering the money that the government is pumping into the economy to get the U.S. back on its feet and given inflation predictions for the years ahead, my portfolio can use something to help negate inflation risk.  

John Carter is Vice Chairman of Carter and CEO of Carter/Validus Advisors, LLC. Data Center real estate is just one of the company’s many disciplines. Mr. Carter plays a key role in establishing and maintaining some of Carter’s most significant institutional client relationships and has completed in excess of $3.5 billion of real estate property acquisitions and financings representing 18.5 million square feet of real estate. Mr. Carter received a Bachelor’s degree in Economics with a minor in Mathematics from St. Lawrence University and a Masters in Business Administration from Harvard University.

 

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