SaaS, PaaS, IaaS – cloud computing segments and 6 investing opportunities

Adrian Tan
Adrian Tan

To set the record straight – cloud computing is not so much a segment, but rather an industry wherein it contains various segments. If you’ve started looking around within cloud computing, you would’ve probably seen the terminologies:

  • Software-as-a-Service (SaaS)
  • Platform-as-a-Service (PaaS)
  • Infrastructure-as-a-Service (IaaS)

Broadly speaking, these are the main segments within cloud computing. When looking for investment opportunities, it is important to recognize the distinctions between the segments as these are often central to one’s investment thesis (something which I hope to illustrate further here).

What Exactly is “as-a-Service”?

If you’ve noticed, the various cloud computing segments are commonly suffixed with “as-a-Service”.  Let’s take some time to clarify what this suffix refers to (which will go a long way to clear things up later).

At its core, cloud computing companies are built around having a business model that involves making computers and/or computing resources available for rental and subscription. The fulfilment or delivery in this case, is done over the Internet and does not involve any actual transfer of physical items thus, leading to the coinage of the term “as-a-Service”.

In fact, this concept should not be foreign to you. If you have Internet access or a mobile phone plan, you would’ve obtained those via a “service provider”.  So, where an Internet Service Provider (ISP) provides Internet access “as-a-Service”, cloud computing companies provide different things like computer hardware or software “as-a-Service”.

In short, “as-a-Service” is a fancy term that’s essentially describing nothing more than a business model.

A layman’s Guide to a Computer

To lay the foundation further for us to discuss the differences between the various cloud computing segments, let us first align ourselves on the basic constituents of what makes up a functioning computer.

One way to visualize and understand it is by looking at the computer as a multi-layered cake that has a bare minimum of 3 layers:

  • Hardware
  • Foundational Software i.e. the Operating System (OS)
  • User Applications Software

Each of these layers interact with each other and have distinct roles to play. Where the hardware (e.g. iPhone) is the actual device a user interacts with and provides the raw horsepower to do stuff; the operating system (e.g. iOS) serves as the foundational software that in turn allows others to build useful application software on top (e.g. Facebook to create WhatsApp). The end result is then a piece of software that is able to run on a given type of computer hardware (e.g. WhatsApp on iPhone!)

As you can imagine, the competitive landscape for hardware, foundational software and user application software is vastly different. From an investor’s standpoint, we would first need to recognize the difference as a first step and then apply appropriate assessment methods accordingly.

Segmenting the Cloud: Infrastructure, Platform and Software-as-a-Service

Fundamentally, the offerings from these different cloud computing segments serve the purpose, work and interact with each other in pretty much the same way as to how the various “layers” would in an actual computer.

Where IaaS deals with hardware, PaaS is about foundational software and SaaS covers the user application software.


Just as how you can choose to buy barebone hardware from Sim Lim and build your own computer, or buy a computer that is pre-built from some big brand computer maker, you can also choose to subscribe to whichever “layer” that you need from the different cloud computing providers. It boils down to what you are willing to spend time on, how much flexibility you would want to have and how technically adept you are to make everything work. The illustration above neatly summarizes this concept.

Different segment offers different things catering to different needs. For example, users wanting to add more storage capacity to their environment and want to retain control of everything else may opt to subscribe to an IaaS or PaaS provider.

Others that simply want to have fully functional software with minimal fuss can opt to subscribe to a SaaS provider. Not unlike the housing market where there are fully-furnished vs. non-furnished options. According to a study by Gartner published in July 2020, the SaaS market is projected to grow from US$105 billion in 2020 to roughly US$ 140 billion in 2022 (roughly 20% CAGR). In the same study, Gartner estimates that the combined IaaS+PaaS market is projected to grow from US$94 billion in 2020 to roughly US$153 billion in 2022 (or slightly less than 30% CAGR).

While, this is a clear sign that there are opportunities in each segment, understanding the differences would allow us to better frame, assess and compare between different cloud computing companies and ensure an apples-to-apples comparison as best as possible and form our investment thesis accordingly.

With that in mind, we can now explore some investing ideas!

Investing Ideas for IaaS / PaaS

First, we can take a look at the PaaS/ IaaS segment.

Since we now understand that this is a business built around providing foundational software and underlying hardware, one of the factors to consider would be platform popularity and adoption.


Well, a widely adopted platform will also lead to a richer eco-system that in turn leads to stronger adoption – classic network effect moat play. One way by which we can gauge popularity and adoption is by looking at market share.

Based on statistics provided by Statista, the IaaS/PaaS market segment looks to have some clear leaders.

The top 3 companies alone have collectively close to 50% of total market share, they are;

  • Inc. (Ticker: AMZN),
  • International Business Machines Co. (Ticker: IBM) and,
  • Alphabet Inc. (Ticker: GOOG/GOOGL) .

This can be a great starting point to start investigating. To paint a picture of how sizeable each respective company is doing in the cloud business:

2019 Cloud Revenue (US$ billion)Cloud Revenue Growth (2018-2019)
Alphabet (Google)8.953%
(Data from the respective 2019 annual reports)

Amazon is growing very robustly in spite of the size of their revenue and looks set to continue its dominance in this space. Alphabet is also growing very quickly albeit from a much smaller revenue base. IBM has a formidable market share, but is growing at a far slower pace.

This means it looks likely for IBM to be in a position to lose market share in this space that could in turn mean a shrinking moat going forward and wouldn’t be that attractive.

Investing Ideas for SaaS

Switching over to the SaaS segment, we will need to view this through a rather different lens as compared to looking at PaaS/IaaS.

Think of it this way – there may be one platform (i.e. iOS) but there are correspondingly tens of thousands of different software apps that serve vastly different needs on the given platform.

This means, in the SaaS space, we can expect things to be more fragmented. At the same time, not all SaaS offerings are necessarily in competition with each other. This means there is also a lot more room for multiple winners.

So where do we start?

One possible way, is by further segmenting SaaS by general categories (i.e. enterprise business software, entertainment software, consumer software and etc.). Personally, I like the enterprise business software category as it is where switching costs (it is a major pain for large companies to change software systems) are high, thereby giving rise to an investment moat. 

Based on a snapshot in Q2 2018 by Synergy Research Group on vendor market share in the Enterprise SaaS space, several names stand out.

The top 3 companies in this space Microsoft Corp. (Ticker: MSFT), Inc. (Ticker: CRM) and Adobe Inc. (Ticker: ADBE) are not only dominant in their own respective specialties in the enterprise environment but each are also growing at a fairly remarkable clip and would each make worthy investment candidates.

To give an idea on the size of the enterprise SaaS business for each of these companies:

2019 Enterprise Cloud Software Revenue (US$ billion)
(Data from the respective 2019 annual reports)

Again, the key here is in understanding that, unlike IaaS / PaaS where one’s gain is often the loss of competitors (i.e. when you choose iOS, this means a loss to Android), there is room for multiple winners in the SaaS space even within the same category.

While Microsoft’s revenue in this space is nearly 4 times that of Salesforce and Adobe, this does not mean Microsoft will have to cede market share should Salesforce or Adobe grow faster.

To put that in perspective, where a company would subscribe to Microsoft for MS Office, the same company could also have subscriptions to Adobe for Adobe Acrobat for completely different use. In short, Microsoft’s gain does not necessarily translate to Adobe’s loss and vice versa.

In Summary

Tech investing can be pretty daunting at first glance, but with a little bit of work, it can be approachable. Understanding the nuances of the industry is often rewarding and provides investors with an edge.

I personally believe that we are moving to a future where tech will become more (and not less) of a feature of our lives and as such I believe it is worthwhile to do the work to understand and invest in that future.

Disclosure: The author owns shares of Inc (Ticker: AMZN), Microsoft Corp. (Ticker MSFT) and Inc. (Ticker: CRM). Investors should conduct their own due diligence before engaging in any buying/selling of any of the shares mentioned.

Adrian Tan
Adrian Tan
Adrian has been working in and around tech for nearly two decades. A geek at heart and an investor who believes in investing for long term-term growth, he fishes in the tech / bio-tech / healthcare sectors where things are often misunderstood (where there is misunderstanding there is opportunity!). Passionate about sharing knowledge to help everyone invest better.
Read These Next

Leave a Comment