If there is one buzz-word that has caught the attention of the tech investing community in recent times, it is “cloud” (and “cloud computing”).
Just what is all the fuss about?
Is this just another fad or is cloud computing really the future that one needs to seriously consider from an investment perspective?
Understanding the Core Challenges that Businesses Face
To evaluate if cloud computing is truly “the future”, we will first need to understand the value it brings. To understand its value, we will need to understand the problem it solves.
I’ll explain Cloud Computing with a simple analogy.
Imagine you need to run a restaurant that aims to serve the largest variety of menu items possible, and be able to serve every single diner that comes through the door.
What do you think it would take to keep an operation like this going?
I’m sure you’ll be quick to realize the primary challenge is to raise the capital needed to purchase and stock up on resources required in your inventory, kitchen space, personnel, etc.
Now supposed you had all the money in the world to put everything in place, would that be a satisfying answer?
Well, unless the restaurant is packed to the brim all the time, chances are there will be lots of inefficiencies in terms of unused capacity and inventory.
In a (grossly) simplified way, the modern tech and IT environment in most organizations suffer from the exact same problems. The exception being that we are dealing with software and computers in the tech space, whereas in a restaurant it is about food ingredients and kitchens.
How Cloud Computing Solves the Problem
Organizations today need more tech and IT in their business than ever before and this leads to a fundamental dilemma as illustrated in the analogy above.
The more tech that an organization adopts, the more expensive it is to setup and upkeep everything in-house due to the investment needed on hardware, software and personnel. The more types of tech that an organization adopts, the more fragmented the usage will be, thereby leading to higher inefficiencies. The larger the organization scales, the more pronounced the problems become.
Early cloud computing solution providers recognized this and figured out a way around this. They figured that, if they could pool all the hardware and software resources together, and share them in some way across to multiple organizations, then they can extract efficiencies and achieve economies of scale.
A valid business can then be built around this idea, by serving organizations as a service provider – selling access via the Internet to hardware and software resources that they own. This is fundamentally what cloud computing (or cloud-based solutions) is all about.
As it turns out, this approach provides an elegant solution and has proved to be wildly popular with organizations. By engaging with cloud computing and cloud solution providers, organizations are enabled to adopt and use technologies on an “as needed” basis, without heavy upfront investment and eliminating the problem of potential inefficiencies within the organization.
What does the Future Hold for Cloud Computing?
In the bigger picture, it should be clear that cloud computing drives tremendous value for all stakeholders involved;
- For suppliers, it is a better way to serve their client base.
- For consumers and organizations, this is a cheaper, quicker and more feasible way to keep up with technology.
As a result a virtuous cycle is formed and that ensures the continued sustainability of this approach going forward.
According to Grand View Research, the cloud computing market is estimated to grow at a CAGR of nearly 15% from 2020 to 2027 (that’s nearly TRIPLING of the market size in ~ 8 years!). That’s pretty much an indication that cloud computing is growing and is here to stay.
How can I Invest in Cloud Computing?
So, we have established the importance of cloud computing which explains why this is a rapidly growing market.
How can one get started as an investor?
If you are just getting started, a good (and arguably more conservative) starting point could be to look at specific segments within the cloud industry where the more established players are and is less fragmented.
One such segment is cloud infrastructure.
Three Major Players in Cloud Computing
According to Statista, as of Q2 2020, three major companies own an estimated 60% share of the USD100+ billion cloud infrastructure segment collectively. They are:
- Amazon.com Inc. (Ticker: AMZN) who owns Amazon Web Services,
- Microsoft Corp. (Ticker: MSFT) who owns Azure, and
- Alphabet Inc. (Ticker: GOOG / GOOGL) who owns Google Cloud.
They are “blue-chip” global household names and are great starting points for would-be tech investors to dip their toes into and be invested in cloud computing.
Of course, these big tech companies have other businesses besides cloud. Here are some numbers to give you a sense of how much the cloud segment contribute to their businesses.
Microsoft had a third of its revenue from its Intelligent Cloud business segment while Amazon and Alphabet generated 12% and 6% from its cloud segment respectively.
Microsoft also generated the most revenue (US$39b) from cloud compared to Amazon (US$35b) and Alphabet (US$9b). Hence, Microsoft would provide you with the highest exposure to the cloud sector among the three.
Although Alphabet has the lowest cloud market share among the three companies, it enjoys the fastest cloud revenue growth rate – more than two times the growth rate of Microsoft’s.
|Cloud revenue growth (2018-2019)||Overall revenue growth (2018-2019)|
All three companies have experienced faster growth rates in cloud revenue compared to other business segments. This means that we should see cloud contributing to a larger proportion of their revenue in the future.
Three ETFs with exposure to Cloud Computing
If you are not into picking individual stocks, here are three ETFs that invest in a basket of companies with cloud services.
They have delivered excellent returns in the past 1 year – probably because of the accelerated adoption of cloud technologies during Covid-19.
|First Trust Cloud Computing ETF (SKYY)||Global X Cloud Computing ETF (CLOU)||WisdomTree Cloud Computing Fund (WCLD)|
|Index Tracked||ISE Cloud Computing Index||Indxx Global Cloud Computing Index||BVP Nasdaq Emerging Cloud Index|
|No. of Holdings||64||37||55|
|Top 3 holdings||Oracle, VMware, Alibaba||Zoom, Twilio, Zscaler||Zoom, Crowdstrike, Anaplan|
|1 year return||+34.9%||+55.5%||+71.5%|
There is very little doubt that cloud-computing is here to stay for the foreseeable future.
For an investor seeking some tech exposure in their portfolios, investing alongside this megatrend is definitely worth serious consideration.
Disclosure: The author owns shares of Amazon.com Inc (Ticker: AMZN) and Microsoft Corp. (Ticker MSFT). Investors should conduct their own due diligence before engaging in any buying/selling of any of the shares mentioned.