Head in the clouds
Thanks to COVID-19 and the quick thinking of savvy investors, the age-old adage that to have ones' 'head in the clouds' is an insult might be about to change.
Of all the megatrends to flip the investment universe on its head in recent times, cloud computing may be the most imperceptible to the everyday Australian at first.
Defining the cloud - as it is often referred to – can be difficult to achieve without delving into technical jargon. However, it is perhaps best understood in light of the way it enables our modern lives.
The cloud underpins everything from streaming a movie from Netflix’s enormous library of titles to connecting to your company’s server in the middle of the night upon realising tomorrow morning’s proposal deck contains a glaring spelling error.
Put simply, cloud computing allows digital data, software, and applications to be accessed via the Internet, resembling a significant shift in their storage and utilisation. Rather than storing data and applications on the physical hardware we own, cloud computing moves these things to server farms all over the world, which we can access remotely through internet-enabled devices.
As we become more interconnected with one another, our reliance on, and usage of, cloud computing continues to grow. While it is clear COVID-19 and the ongoing lockdowns it caused were negative for many sectors, cloud computing was one of the few to be supercharged by our sudden shift to social distancing and isolation.
Spending on cloud technology rose by 37% year on year to US$29 billion during the first quarter of 2020, according to Synergy Research Group, as the pandemic caused global workforces to decentralise, with many workers and companies forced to adopt work-from-home arrangements and technologies for the first time. As COVID-19 failed to subside throughout 2020, spending continued to rise, reaching US$37 billion, an increase of US$4 billion on Q3, and up by 35% year-on-year.
According to McKinsey, the cloud’s growth is projected to continue apace, with the global consultant estimating that cloud computing’s facilitation of emerging technologies such as augmented reality and blockchain could see it generate more than US$1 trillion in 2030 EBITDA value across the Fortune 500 by the end of the decade.
While investors have flocked to the major tech stocks – such as Facebook, Amazon, Apple, Alphabet and Netflix – in recent years, attention is now turning to the technology providing the underlying capability for those global behemoths to continue to grow.
Companies providing cloud computing services – including Shopify, Salesforce and Zoom – are typically listed on overseas exchanges, making direct investment tricky for local investors. However, several local firms are leading the Australian charge, including the ASX-listed data-centre-as-a-service provider NextDC (ASX: NXT) and global elastic interconnection service provider, Megaport (ASX: MP1).
In an Australian-first, local ETF provider BetaShares recently listed a cloud computing ETF, (ASX: CLDD) which is designed to provide investors with broad exposure to leading companies in the global cloud computing industry.
BetaShares Director of Adviser Business Blair Modica said cloud computing service providers had developed an “appealing business model” centered on recurring and projectable cash flow generated by the sector’s subscription fee model.
“Once companies integrate cloud services into their processes and their employees become accustomed to it, replacing the provider becomes difficult – even if fees are increased,” Modica said.
“Centralised data storage facilities and software applications also naturally lend themselves to economies of scale – whereby the costs per unit of service fall as the number of customers grows.”
According to BetaShares Chief Executive Alex Vynokur, the decision to list a cloud computing fund reflects the desire of Australian investors to gain exposure to one of the most significant trends shaping global markets despite the big players – such as Microsoft, Dropbox, Netflix, and Xero – being listed elsewhere.
“We’re seeing investors increasingly demand exposures to secular growth themes,” Vynokur said.
“CLDD has been carefully designed to offer a ‘pure play’ exposure to the cloud computing theme. Its methodology ensures that only companies whose primary focus is on cloud-based services are included in the portfolio, and excludes large, diversified tech companies whose global cloud services represent only a small part of their business.”
The move follows a period of sustained success for cloud computing ETFs in the United States, where investors can choose from several ETFs offering access to the megatrend.
CLDD’s underlying index - the Indxx Global Cloud Computing Index – has returned 29.17% since inception in 2013.
But as Vynokur puts it, the best of cloud computing is yet to come.
“Even with the significant take-up experienced to date, we believe the megatrend in cloud computing has only just begun,” he said.