Cloud providers such as Amazon, IBM, and Microsoft are leasing their computing resources to various businesses providing them an alternative to investing in expensive hardware. Although recent information systems research has examined pricing‐related issues in cloud computing, several important questions still remain. For example, how should buyers decide on the capacity portfolio of private and public clouds? What is the impact of the buyer’s demand uncertainty on the capacity portfolio decision? We address these questions in this study through a stylized model. Our analysis reveals that the investment in cloud infrastructure (private, public or hybrid) is based on the profile of the buyer’s demand. When a buyer faces demand with low mean, she relies on public cloud solutions. If the demand has high mean, then the buyer firm hosts applications on a private cloud. Implementing a hybrid cloud is the optimal strategy when the mean demand is in mid‐range. We find that high demand variability makes businesses to move toward public cloud solutions. We support these insights through examples from practice in the cloud computing industry.