The Top Three Cloud Stocks from Gartner’s Magic Quadrant:, Inc. (AMZN), VMware, Inc. (VMW)

The cloud market can be a big, daunting place. Cloud adoption is growing at a rate of five to eleven times faster than traditional software, and a large portion of IT budgets are increasingly moving over to the cloud. This growth can be attributed to the lower barriers to entry and lower switching costs, which are sparking much more development and activity in the cloud. But who are the real market leaders? Research firm Gartner’s answer lies in its Magic Quadrant report for the Infrastructure as a Service (IaaS) market.

Image: Gartner’s Magic Quadrant

The Gartner Magic Quadrant is widely recognized as one of the most influential market analyses for enterprises seeking to evaluate cloud and hosting vendors. Its evaluation is based on vendors’ completeness of vision, including market understanding, product strategy and innovation, among other criteria. The Magic Quadrant also assesses ability to execute, which includes operations and overall viability.

In this article I will focus on three top cloud stocks included in the Magic Quadrant report that could deliver significant returns to investors over the longer term. But first, what does the term “cloud” mean in a broader sense?, Inc. (NASDAQ:AMZN)Cloud Computing Defined

The consumption model – Cloud computing offers a unique way to consume a shared pool of computing resources (including networks, servers, storage, applications, and services) that can be added or removed quickly and at a potentially lower cost than a traditional IT infrastructure.

The services model – The three fundamental cloud computing services models are infrastructure as a service (IaaS), platform as a service (PaaS), and software as a service (SaaS). Choose any or all of these models depending on your needs.

The deployment model – There are numerous ways to deploy and use clouds with various considerations, including private cloud, community cloud, public cloud, and hybrid cloud. You can customize your deployment model according to security, network access, IT skills, and more.

Top Three Cloud Stocks

To be included in the Magic Quadrant, the provider must offer a stand-alone IaaS offering run across at least two data centers, complete with 24/7 customer support. Because of the focus on market share, the MQ report takes a more company-and-market-dynamic approach to evaluating firms, rather than a pure look at the technical offerings of each company. It’s a solid guide, though, and provides a basic who’s who in the cloud.

1., Inc. (NASDAQ:AMZN), Inc. (NASDAQ:AMZN) is well known to online shoppers, but its Amazon Web Services, or AWS, business offers a cloud-based set of infrastructure and application services to businesses that can be used to run everything from mobile apps, to websites, to big-data operations. And it’s quietly become an increasingly more valuable part of the company’s revenue — and its stock price, which is up more than 50% over the last 12 months.

Carlos Kirjner, an analyst with Bernstein Research, estimated that nearly 20% of, Inc. (NASDAQ:AMZN)’s current share price comes from the value of the Web services arm. This would make the AWS business worth about $24 billion. AWS is the internet infrastructure that is the backbone of cloud-architecture based software and services. AWS has one of the widest breadths of cloud services — including compute, storage, networking, databases, load balancers, applications and application development platforms, all delivered as a cloud service.

Kirjner estimates that last year, AWS contributed $1.8 billion to, Inc. (NASDAQ:AMZN)’s revenue, and that was double what the business did in 2011, but nothing compared to the $20 billion in revenue it is expected to bring in by 2020. “AWS is likely to grow at a rapid pace for the next several years as Amazon improves the security, compliance, and performance of current offers, expands AWS into new geographies, introduces new products and services and targets new multi-billion revenue pools,” he wrote.

The company is “extraordinarily innovative, exceptionally agile, and has one of the richest IaaS portfolio of services,” according to Gartner. Its large pool of capacity in the cloud optimizes it for batch computing, high-performance computing, and big data analytics. It has a large technology ecosystem, which makes running licensed and packaged software easy to do in its cloud.

There are some cautions for, Inc. (NASDAQ:AMZN), though. One analyst, Jillian Mirandi of Technology Business Researcher, has suggested that continued outages could eventually start hindering businesses’ willingness to invest in Amazon’s infrastructure. For a more comprehensive view on Amazon as an investment opportunity, you can read my earlier post: Why This E-Commerce Stock Is A Conviction Buy?