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Cloud Kings

The cloud is one of the most important drivers of growth for big technology firms. It could also be a significant opportunity for the savvy investor, says Chris Smith of CMC Markets.

7 October 2021

As consumers, we often take for granted how well the apps and online services we use can perform. For example, storing high-res photos and videos on our mobile phones is faster than ever before and costs very little.

At the touch of a finger, you can watch your favourite movie, order a taxi, or transfer money between bank accounts.

But have you ever actually considered how these businesses – Uber, Facebook, Netflix – manage the billions of data points they capture, while still offering a seamless service? These popular platforms couldn’t do what they do without online data storage and processing infrastructure – better known as ‘cloud services’.

What is cloud computing?

As CNBC’s Jim Cramer says: “There are a lot of great opportunities in the cloud space, but if you’re going to own these stocks, you need to understand what these companies actually do.” Cloud computing is a term used to describe how computing services are delivered over the internet. The term covers both private data centres and public servers, storage, databases, software, analytics, and intelligence.

An online network is more efficient than having your own computer server, because it doesn’t need to be managed by a staff member, and you get instant access to a suite of shared resources. Data analytics company IDC predicts global spending on cloud infrastructure and services will reach US$500 billion by 2023, almost double last year’s US$229 billion.

How does it work?

Rather than running their own computer servers or data centres, companies lease access from cloud providers via subscription plans. This dramatically reduces costs for startups, and helps larger businesses wanting technical expertise to help them grow globally. Cloud providers manage and own the IT infrastructure, so businesses simply pay for what they use.

The cloud ‘kings’

There’s a lot of money needed to set up and operate a cloud business, and there’s a lot of competition, so the cloud storage industry is dominated by a few big tech companies. In America, Amazon’s AWS, Microsoft’s Azure and Google’s GCP are competing for the top spot. In Asia, e-commerce giant Alibaba Cloud is the leader, along with WeChat owner Tencent Cloud and mobile phone-maker Huawei Cloud. Market share reports show Amazon grew its market share to 47 per cent, with its nearest competitor, Microsoft, at 22 per cent, followed by Google, at 7 per cent.

Google Cloud: Google Cloud is the third-largest provider in the United States, and its cloud infrastructure revenues have doubled in the last 18 months, to about US$8 billion a year. According to Google and Alphabet chief financial officer Ruth Porat, “Google Cloud Platform remains one of the fastest growing businesses in Alphabet, with strong customer momentum reflected in particular in demand for our compute and data analytics products.”

Microsoft Azure: Azure is the cloud computing division of Microsoft, which says it is a set of cloud services designed to meet business challenges by building and managing new applications via its global network. Today, more than 95 per cent of Fortune 500 companies use Azure. Microsoft has seen rapid growth over the past year. Its commercial cloud business grew by 41 per cent in the first three months of 2019, to US$9.6 billion.

Amazon Web Services: Jeff Bezos’s Amazon has long led the cloud market pack, using its hugely profitable web services division to expand the rest of the group. Many years ago, Amazon realised it had space available outside peak shopping periods that it didn’t need for its retail operations. This gave it the chance to charge businesses to host and build their own services using Amazon’s infrastructure, instead of investing in their own servers. Amazon Web Services launched in 2002, and has names like Facebook, Netflix and LinkedIn among its customers. AWS has become one of Amazon’s strongest business units. It generated US$25.66 billion in net sales in 2018, up 35 per cent from quarter two to quarter three last year.

Alibaba Cloud: Alibaba’s a household name in China, an online shopping giant that is to China what Amazon is to the US. Like Amazon, it’s also a major player in cloud computing services in China. Alibaba Cloud provides cloud services to online businesses, as well as its own retail business, and operates 19 data centres around the world. Launched in 2009, Alibaba Cloud is growing fast and could soon be right up with its Western competitors. Reports predict revenue may reach US$4.5 billion this coming year and it’s likely to overtake Google to become third in the world.

How to invest in the cloud

If you’re looking to invest in the technology, there are thousands of software firms that use cloud computing to run their business applications and services. These firms fall into one of two groups – SaaS (Software as a Service) or PaaS (Platform as a Service). Interested investors and traders should spend time researching some of the major firms that are growing fast, such as:

Adobe: A design software and business document application.

Salesforce: Customer Relationship Management (CRM) software, which gathers in one place all a company’s sales and customer information.

Workday: For payroll and human resources. Xero and Intuit: Online accounting and finance firms.

Shopify: An e-commerce firm.

Dropbox: An online content-sharing platform.

Survey Monkey: Online surveys for marketing and customer satisfaction reports.

Other less familiar names include: Twilio, which provides text messaging expertise, so that firms like Uber and Airbnb can send alerts to their customers. HubSpot, a marketing software company with tools for social-media marketing and managing content.

Future trends

We’re unlikely to see the growth of the cloud storage industry slowing. Areas to watch are Artificial Intelligence and Cyber Security services, which are high on business risk. Health services will also be a big trend as consumers seek health information and services online, along with health organisations moving to online solutions.

Published 25 November 2019

This article does not contain any financial advice and has not taken into account any particular person’s circumstances. Before relying on it, we recommend you speak with a financial adviser. This story reflects the views of the contributor only. Content comes from sources that we consider are accurate, but we do not guarantee that the content is accurate.

Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The author does own shares in some of the securities mentioned.

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