The cloud is clearly spreading. Once seen as a nascent technology, cloud computing is now the foundation for the adoption of advanced technologies such as the Internet of Things, blockchain and artificial intelligence. Today, more and more enterprises are working on a cloud policy or are moving towards its adoption. This is reflected by the rising spending on cloud; reports suggest that the growth in information technology spending on cloud-based offerings has surpassed the growth in spending in traditional information technology offerings.
Here’s a look at the ways to invest in the cloud computing space via exchange traded funds and select stocks.
The cloud comes with multiple advantages such as flexibility, easy access, scalability, disaster recovery, agility, energy efficiency, and opportunity for enterprises to pay for resources they need without undertaking costly investments in rarely used systems thereby reducing excessive capital expenditure. Based on such factors, there are multiple estimations on the cost benefit that cloud offers to enterprises; while the range varies from 10% to 250% as much as local IT, most estimates project savings of at least 50%.
By embracing cloud, enterprises are freeing themselves from the hassle of procurement, capacity planning and maintenance of IT related infrastructure. However, before any such move, the understanding of the right cloud computing model is crucial. Infrastructure as a Service (IaaS), Platform as a Service (PaaS), and Software as a Service (SaaS) are the three cloud computing models with the deployment option as cloud, hybrid or on-premise. It is projected that more than $1.3 trillion in IT spending will be directly or indirectly affected by the shift to cloud by 2022.
To be a part of the cloud shift, an investor can invest either via an exchange traded fund (ETF) or buy shares of companies that offer cloud services. ETFs are a convenient way to hold a basket of stocks within the segment.
The First Trust Cloud Computing ETF (SKYY) is an exchange traded fund that tracks the ISE Cloud Computing Index which is a composed of 28 companies actively involved in the cloud computing industry. Launched in 2011, it has $2.23 billion as assets under management. The top stock holdings of the ETF are Zynga, VMware, Netflix, Teradata, Equinix, Cisco, SAP, Facebook, Oracle and Open Text which add to 50.18% of the portfolio. The concentration ratio towards the top five holdings is about 26.72%.
Next is the recently launched ETF by Global X. The newly launched Global X Cloud Computing ETF (CLOU) as the Indxx Global Cloud Computing Index as its underlying benchmark. The index comprises of companies which are involved in various computing services -- servers, storage, databases, networking, software, analytics. This ETF is positioned to benefit from the increased adoption of cloud computing technology. It currently has a portfolio of 36 stocks and $1,499,853 as assets under management. The top holdings are Zsclaer, Shopify, Paycom, Coupa, Workday, Proofpoint, Twilio, Ultimate Software, Paylocity, and RealPage with a 45.58% exposure.
In terms of market share, some of the key players are Amazon (AMZN), Microsoft (MSFT), Google (GOOG, GOOGL), IBM (IBM) and Alibaba (BABA). Amazon continues to be the undisputed leader by a huge margin with its market share equivalent to the share of the next four together. Amazon generated $25.65 billion in revenue for AWS during FY2018 (FY: January – December).
During calendar year 2018, the revenue growth by Microsoft, Google and Alibaba was above the overall market growth rate as per a Synergy report. Microsoft has the second largest market share and during Q2 2019, the intelligent cloud segment recorded a revenue of $9.6 billion which constitutes almost 30% of the company’s overall revenue (FY: July – June).
Google’s focus on cloud has been increasing in recent years and today, Google is neck-to-neck with IBM in terms of market share. However, Alphabet does not disclose the revenue from its cloud business as a separate head in its earnings report but is grouped under ‘other revenues’ category.
Among these top players, IBM’s focus area remains slightly different from the others. It continues to dominate the ‘hosted private cloud services’ segment of the cloud market. During Q1 2019, IBM’s cloud revenue growth accelerated to $19.5 billion (FY: January – December).
For Alibaba, cloud computing an integral part of its long-term strategy. Alibaba’s cloud computing revenue grew 84% year-over-year to $962 million during the Q3 FY2019 (FY: April – March).
Overall, the transition towards cloud computing is in earnest, and it presents a huge opportunity for technology providers and investors.
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