Portfolio Adviser • Portfolio Adviser Magazine February 2022 • Sector report

The cloud’s transformational power gives it the potential to rewire the global economy and be the catalyst for the fourth industrial revolution.

As the world’s digital data continues to grow at a rapid pace, storage management will become increasingly crucial.

While the cloud provides a great solution for data storage, its true potential comes from how vast amounts of data are analysed and used in a collaborative manner to deliver insights and drive innovation.

We are already seeing the tangible application of data mobilisation in apps like Google Maps. With large datasets and compute capacity, machines can learn how to pre-define algorithms better than humans, and the cloud enables that.

The implications of the democratisation of data and enablement of cloud technology are vast. So, how do you structure your investment exposure?

Looking at the cloud value chain through our lens, we break down cloud technology into three segments.

Enablers – As we see broader migration and adoption of the cloud, there will be higher demand for the components driving these processes. And as the cloud supports more complex computation and analytics, there is greater need of higher- performance components.

Semi-conductors – It’s difficult to overstate how important semi-conductors have become to the global economy. They are needed in everything from data centres and smartphones to cars and washing machines.

While the semi-conductor industry’s customer base has expanded from being solely PC-centric in the past to now include smartphones, artificial intelligence (AI), Internet of Things, 5G and smart cars, the number of industry participants has consolidated.

Today, the semi-conductor industry has only a few dominant players. It is an industry that has demonstrated steady growth, high margins and lower cyclicality. This presents solid fundamentals for long-term investment opportunities.

Components – As the cloud unlocks greater functionality, more industries and markets will make the case for more devices connected to the cloud. In turn, this increases the need for central processing units, graphics processing units and memory chips; sensors; connectivity with micro controllers; and storage capacity.

The next stage looks at the companies that deliver cloud technology as a solution to users and we divide it into two categories: infrastructure providers and software providers.

Infrastructure providers – Cloud infrastructure includes well-known names such as Amazon’s AWS cloud services, Microsoft Azure and Google Cloud.

These companies have built a dominant market presence by expanding their product offering and reaching more clients.

This continued dominance could offer compelling investment opportunities. While the Covid pandemic has accelerated the shift to the cloud, there is still a potentially long runway of secular growth for the dominant companies.

There are also pockets of regional growth. In China, Alibaba and Tencent currently have 6% and 2% of the global market share, respectively. However, cloud adoption in China is behind other regions and the government’s ambition to catch up is leading to a much steeper growth trajectory.

The initiative from the Chinese government is focused on the cost of transition, paying up to 100% of the costs for small-and mid-sized businesses to migrate to the cloud.

China is behind in adopting cloud computing, but Covid accelerated this trend. The path of adoption might be different from the US, with mobile-related usage a key area of growth.

Software providers – There are more than 20,000 software-as-a-service companies globally but less than 1% of those are valued at more than $1bn (£745m).

There are two main ways to capture significant market share in software. One is to specialise in a particular industry or sector and serve that market end to end. The other is to provide a package with features that serve customers across a wide variety of industries.

The third layer of investment opportunities in the cloud comprises the beneficiaries, ie innovators using cloud technology to disrupt their own industry.

This has the potential to drive growth and create value that simply did not exist before. This layer has the broadest application for investors as the cloud has the potential to offer solutions across industries both old and new.

A few industries that are likely to benefit significantly from cloud computing include energy, healthcare, education, agriculture, transportation, utilities and manufacturing.

The cloud’s power spans data storage, distribution platforms, big data analytics, machine learning and AI.

Identifying different investment areas within the cloud value chain can help more effectively flag the opportunities and risks for companies positioned to harness the power of the cloud.

The broad applications of cloud technology mean it can be the lifeblood of the future global economy.