We’ve covered the rise of cloud computing a fair bit at Investment U. By now, readers should understand that files in the cloud aren’t actually floating around… and that they’re stored in internet-connected data centers around the world.
One of the attractions of cloud storage is that it helps you save space. Using the cloud keeps your computer from getting bogged down with files. And you don’t have to buy a cumbersome external hard drive or easy-to-lose thumb drives.
But for cloud service providers, infrastructure actually takes up a lot of physical space. The server racks that hold your files are very big – and very sensitive to temperature. Data centers require climate-controlled warehouses like the one pictured above. And all of these physical challenges have led to the creation of a new kind of investment: cloud real estate.
What Is Cloud Real Estate?
Maintaining a cloud data center requires a lot of land and a lot of effort. Servers are very valuable and finicky things. Too much moisture or temperature variation can break them. And since they hold files for thousands of people, they’re appealing targets for cyberterrorism, espionage and other high-tech crimes.
So to run a good data center, you need a big warehouse with strong security measures and a robust HVAC system. You also need engineers on call 24/7 in case something goes awry.
With so many upkeep expenses, you may be wondering – why would a data center serve only one cloud computing client?
They don’t. In order to pay their maintenance costs, cloud data centers generally rent to multiple tenants. See where we’re going here? Data centers are basically the cyberspace equivalent of apartment buildings. It’s a real estate business.
And just like regular real estate, you can invest in cloud real estate through REITs.
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There are six data center REITs available on the major stock exchanges. The three highest gainers are CoreSite (NYSE: COR), Digital Realty(NYSE: DLR) and DuPont Fabros Technology (NYSE: DFT). All have gained at least 25% this year.
Why have these cloud real estate REITs been so successful? Partially because they offer tenants more control and customization than their competitors.
Cloud giants like Microsoft (Nasdaq: MSFT) and Amazon (Nasdaq: AMZN) also rent out file storage space. But it’s on their terms, using servers they own and manage. If the data center REITs are like apartment buildings, then Microsoft and Amazon are like hotels. They’re both places to sleep, but you’re not allowed to redecorate a hotel room.
These REITs are part of the constantly expanding cloud space. It started as a way to provide portable business software, and now it has grown into the backbone of the modern internet. It might be too late to invest directly in the big cloud companies like Amazon – they’ve already taken off. But by investing in the land beneath the cloud servers, you can get in on the nascent cloud real estate boom.
Our Chief Income Strategist Marc Lichtenfeld has even recommended some data center REITs to his Oxford Income Letter subscribers. To learn more about his investment strategy – which focuses on proven dividend payers – check out this short video.