Chris Gannatti on the growth potential of cloud computing and the tailwinds that are going to drive the sector's performance.
A recent report estimates that the world’s data will grow at a compound annual growth rate of 61% between now and 2025, from a level of 33 zettabytes to a level of 175 zettabytes. As a quick aside, one zettabyte equals one trillion gigabytes.
In 2025, it is projected that 49% of this data will be stored in the public cloud. Therefore, if one believes that the growth of data generation will continue unabated, the growth potential of the cloud should occur, possibly completely independently of any economic growth conditions.
We can see the impact already from looking at the top 10 companies of the S&P 500.
- The five largest companies by market capitalisation all deal extensively with data. Some even collect data through “free” services, such as using Gmail for email or using Facebook to connect with friends and family.
- The five largest companies had a total market cap of more than $4 trillion. Microsoft was more than $1 trillion by itself. Apple and Amazon have each eclipsed $1 trillion in the recent past.
Dealing with data
Over the past 15 years, the world has completely changed how it feels about data. There was a time when individuals had to depend on their hard drives - and possibly backups - to store anything they wanted. Music or movies are great examples, in that the world has shifted from physical discs and players to content being available on a distributed platform with a login and monthly fee.
Companies have done the same, in that there was once a need to maintain physical infrastructure such as servers on premises, but now this is shifting to distributed, monthly subscription-type services where the data is always there and always accessible through an internet connection.
The world’s data, in short, has been moving to the cloud.
On 6 January 2016, Netflix expanded its service to more than 130 new countries. This was after a seven-year effort to move from its own traditional data centres on to cloud services provided by Amazon Web Services.
If Netflix had attempted to build its own infrastructure in enough locations worldwide to make it feasible to serve 130 countries, the business model may have failed under the weight of such capital intensity.
Although this is a very high-profile example, the fact remains that companies of all sizes can use the cloud for their infrastructure needs, allowing them to pay only for what they need and to scale quickly if the occasion calls for it.
Providers benefit from the recurring revenue and the ultimate stickiness that they experience from customers remaining loyal. There is also the possibility to attain operational leverage, in that revenues have the potential to expand at a faster rate than variable costs once the customer base reaches a certain size.
Early innings for data transition
As we enter autumn 2019, global equity markets have been at, or near, record highs in many instances within the prior 12 months. There are concerns that recessions may be a reality in the coming years and that equity returns in the coming 10 years will be less than over the past 10.
If the result of discussions led to people considering Google, Amazon, IBM or Microsoft for their cloud services, in our view, the investment opportunity would miss the mark. These are some of the world’s largest, most well-known companies, and they all have diversified business models.
Instead, smaller, less well-known firms that are more directly focused on delivering cloud services could represent an interesting, purer play on the growth opportunity that cloud computing could represent.
Many of the pure-play cloud services companies have exhibited stronger year-over-year revenue growth than the larger companies in the S&P 500, many of which have driven excitement and returns over the past 10 years.
Over the past 10 years, many investors have benefited from exposures to market capitalisation-weighted indices, such as the S&P 500. This tells us that many of the world’s largest companies have tended toward quite strong returns.
As these companies have grown, their ability to continue to deliver performance may be challenged. Cloud computing may be an avenue for more specific exposure to tech firms with a different set of growth prospects going into the next decade.
Chris Gannatti is head of research, Europe, WisdomTree.