Cloud computing is in its early stages in China, and 21Vianet Group Inc. seems to be consolidating power in the space. The company runs 39,000 servers for 1,300 companies throughout China, and that was good enough for net revenue of nearly $80 million last year. Investors who have seen the success of cloud computing companies in the U.S., will likely watch the 21Vianet IPO with interest. Is it a buy? Here are three arguments for adding VNET to your portfolio:

1) Interest in the cloud is booming. If you’re unsure how to evaluate 21Vianet’s financials, just take a look at similar companies in the space. Rackspace Hosting, Inc. (NYSE:RAX) out of San Antonio, Tex., has quickly evolved from a traditional hosting company to a cloud-based hosting company. Of Rackspace’s 130,000 customers, 110,000 of them use the cloud. The company operates 56,000 servers and counting (compared to 21Vianet’s 39,000), and investors have pushed Rackspace shares up more than 36 percent since the start of the year. That’s got RAX trading at a P/E of 123! Investor interest in the space has been piqued, and 21Vianet should benefit from that enthusiasm.

2) Revenue in the clouds. 21Vianet faces competition in ChinaCache International (NASDAQ:CCIH) – a smaller China-based data services provider that IPO’d in October of 2010. Shares in CCIH have tumbled more than 40 percent since listing on the NASDAQ as profits have proven weaker than they were in 2009.

21Vianet’s revenue on the other hand grew 68 percent last year to nearly $80 million. The would have been good enough for sizable profits if the company hadn’t handed out share-based compensation like candy. All told, 21Vianet gave out more than $40 million in stock and stock options to employees. Expect those numbers to taper off dramatically as the company trims expenses and starts aiming to impress the Street. Revenue growth near 70 percent should be more than enough to keep investors happy. So long they can rein in expenses, it should be all systems go for VNET.

3) Mushrooming growth. 21Vianet touts itself as China’s “largest carrier-neutral Internet data center services provider.” While the country’s cloud hosting services have long been dominated by giant telecoms, there are signs that independent upstarts like 21Vianet are chipping away at that hegemony. Carrier-neutral providers grew their market share from 32 percent in 2008 to 35 percent in 2009. Even if telecoms retain their grip on cloud hosting, the data-center services market is rapidly expanding – a fact that will doubtless help 21Vianet move toward profitability.

International Data Corp. predicts a compound annual growth rate of 23.8 percent in the industry through 2014. That would balloon the data center services market from a $667 million industry in 2009 to a $1.9 billion industry by 2014. Pick the right horse in the race, and you’ve got what will likely be a winning stock.

Fred’s best guess: Keep in mind, this does NOT constitute investment advice. I’m not quite sold yet. A shaky street reception for ChinaCache makes me want to see profitability (and ongoing revenue growth) from 21Vianet before I buy. That said, China’s big winner in the cloud hosting space will likely be a multi-billion-dollar company in a few years. I’m just not sure which carrier-neutral company that will be.

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Tags: CCIH, cloud computing, RAX, VNET

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