The cloud is at the heart of modern technologies. What are the top trends in the cloud and how can investors position themselves to benefit from them?
By Esty Dwek, CIO
Cloud computing has long been a trend in the software and IT industry. Its impact and scalability are enormous, driving strong revenue growth for emerging companies as well as established players. The cloud is changing the way we use technology because it simplifies and makes current technology faster and more efficient. The simplicity of the solutions and the return on investment are the main drivers of their adoption. The transition to subscription models strengthens customer loyalty mechanisms and gives cloud providers stable recurring revenue. According to analysts ’projections, global spending on cloud computing services is expected to reach more than USD 482 billion in 2022, from USD 313 billion in 2020.
Artificial intelligence is facilitated by the cloud infrastructure for harvesting, storing and processing massive amounts of data. Machine learning tools help organizations in a variety of industries create value from insights gathered through data processing, model training, and predictive analytics. Automation software like UiPath is also important to help businesses optimize and build automations quickly. The cloud is central to enabling advanced digital solutions to run smoothly and securely.
Cloud solutions also help protect businesses and customers with cloud servers and secure access. For critical data, companies are increasingly relying on backups based on an external cloud server. The storage industry is approaching solution-focused (data collection, processing, and analysis), rather than just data storage. As security and privacy become increasingly focused, cloud technologies are gradually being integrated into the growing field of blockchain technologies, for example for decentralized storage architecture solutions that are more resistant to data changes.
Games and the Metaverse
Virtual worlds of games, the metaverse, augmented reality (AR) or virtual reality (VR), are all made possible by cloud technologies that allow data to be shared securely and quickly. With the emergence of the gaming industry, disruptive innovations such as enhanced VR/AR games have been introduced into the virtual world known as the metaverse. Real businesses are born in the metaverse, and companies like Roblox may be well positioned to take advantage of that. Roblox, an online gaming platform popularized for its metaverse interphase, has a market capitalization of nearly USD 55 billion. Notably, Roblox launched an open cloud, to support the game’s creators. The amounts invested in the metaverse are negligible, with massive capitalization technology companies such as Nvidia, Microsoft, Alphabet and Meta (Facebook) investing heavily.
How to invest?
Because cloud technologies are likely to go a long way, given their presence in all aspects of our lives, it is important to explore different ways for investors to gain exposure because, like all emerging technologies markets, it is very difficult. to guess who will win.
Two instances came up:
1. Technology giants
Some of the larger, more established technology companies are also benefiting from the growth of cloud computing. These include Microsoft, Amazon, Alphabet, Salesforce and Oracle.
Amazon Web Services (AWS) controls 32%, Microsoft Azure 21% and Google Cloud 8% of the global cloud infrastructure market share. These companies not only respond to individuals and businesses, but also count governments as their valuable customers. The growth rates of some of these cloud giants are high. For example, in its most recent quarter, AWS saw 39% revenue growth, Azure 50% growth, and Google Cloud 4% growth.
These companies whose market capitalization exceeds USD 1,000 billion are however vulnerable to antitrust laws or regulations. However, their income stability and profitability are high. As a result, they can continue to reinvest in their businesses, make acquisitions, or return capital to shareholders through dividends or share buybacks.
2. Emerging cloud companies
Emerging cloud companies that have had little success but have not been well established, however, have huge growth potential. However, some of them are likely to find their technologies lagging behind as they compete for market share and have fewer resources to fend off competition. Historically, these companies have been more volatile than more stable players with more consistent earnings and healthy balances that allow for acquisitions, dividends or share buybacks. Many of these younger cloud companies are not yet profitable but have huge potential.
The BVP Nasdaq Emerging Cloud Index includes companies involved in the cloud, from web infrastructure, security, gaming, and fintech. Index companies include digital transformation leaders such as Adobe, Docusign, Salesforce, and cybersecurity vendors such as Crowdstrike, and Zscaler. The index also includes web infrastructure leaders such as Cloudfare, Snowflake, and Datadog, and web development companies such as Atlassian, Wix, and Hubspot. Other companies are from e-commerce (Shopify), communications (Zoom), and fintech (Square and PayPal).
The rapid growth and adoption of the cloud has helped the theme perform higher on average against major US indices.
Younger cloud companies tend to have something unique about them that makes them successful. However, their growth is less predictable, and they are more vulnerable to stock market crashes. For example, the stocks of these companies have suffered recently, as well as growth stocks, as investors have become more focused on valuations due to rising interest rates.
However, investors continue to seek exposure to these young companies, as cloud specialists have performed particularly well in the past – better than Wall Street expected, as it is difficult to make accurate predictions for them. . innovative companies, and because cloud usage rates are rising. .
Emerging cloud companies are not lacking in risk, and many of them often experience steep declines. In general, high growth stocks trade in very high multiples but not all are profitable yet. For example, in 2020, cloud stocks benefited from lockdowns, which accelerated the digitalization of the economy. This situation has been exacerbated by historically low interest rates and finding capital with very few investment opportunities.
Investors in emerging cloud companies also need to have a risk appetite and a long-term horizon with high volatility.
There’s no doubt that cloud computing is changing our economies, but there are a few angles to consider before investing. For investors with a very high risk appetite, emerging companies seem promising. On the other hand, these stocks require high valuations and can be particularly sensitive to economic conditions, or to the expected rise in interest rates. Alternatively, tech giants involved in the cloud are potentially attractive for a less risky proposition, as they have historically delivered more consistent profitability and revenue growth, which has led to more stable their stocks.
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