By Anthony Ginsberg, Managing Director, GINS Global.
When it comes to industrial megatrends that are going to define our lives in the next 20 years, the growth in reliance on the Cloud, and the companies that support it, has to be one of the biggest.
Anthony Ginsberg, Managing Director, GINS Global.
While few ETFs currently track Cloud-specific indexes, the underlying value of those companies that are at the forefront of this revolution continues. Currently, the burgeoning Cloud sector is estimated to represent 60% of all annual IT expenditure in the US (2019) and annualized growth of 20% (according to Gartner Research).
One of the big Cloud-related stories this month features two names in our own Cloud index, namely Microsoft and Salesforce.
Salesforce the leading CRM Cloud player, recently announced its Marketing Cloud service will run on Microsoft’s Azure public cloud infrastructure – globally. It will no longer use its own infrastructure. Salesforce still uses Amazon Web Services [1].
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Microsoft and Salesforce have a complex history, including acquisition talks. Beyond adopting Microsoft’s Azure, Salesforce will develop technology to integrate its Sales Cloud and Service Cloud products – using Microsoft’s Teams communication app. It will also allow Salesforce’s Chatter to compete better with Slack’s social network for internal business communication. As Microsoft’s Teams and Salesforce’s Chatter begin operating more closely, this will put pressure on the likes of Slack.
Microsoft remains a very interesting component in the Big Cloud strategy as it is pursuing a number of key initiatives in what we call ‘hybrid Cloud’. These are services from companies that are cautious about fully embracing the Cloud when it comes to data storage. Often there are very good reasons for this, for example regulatory restrictions on firms in the financial services space.
Microsoft has seen its commercial Cloud revenue – the rental of Cloud-based computing power to clients’ firms – double in two years to $11.6 billion in the last quarter [2]. It is being driven by its landmark Azure web-services product. Microsoft’s Azure Cloud unit also recently won the US Defense Department’s largest ever Cloud contract worth $10bn (JEDI Project) – beating out heavily fancied Amazon [3].
Despite this, Amazon remains the largest Cloud player with a market share of approximately 31%, with Azure around half that size – followed by the likes of Google, Oracle and IBM. Currently Amazon’s Cloud Unit (AWS) generates close to 60% of its total earnings, despite AWS (Amazon Web Services) representing no more than 10% of the group’s entire revenues. Azure has recently gained market share by cleverly bundling its Cloud services offering with its Office 365 platform.
NVIDIA results
Elsewhere in Big Cloud country we have also just seen the results out from NVIDIA [4]. In our view NVIDIA surprised many analysts, by confirming it is increasingly becoming a software company and it is no longer as reliant on its hardware origins. This is a trend we are seeing with other big US companies that nurse Cloud ambitions.
As a key supplier of graphic processing units (GPUs) – for autos, data centers and gaming – we are encouraged by the fact that NVIDIA’s Data Center unit is showing healthy revenue growth. This unit is NVIDIA’s second largest area – and posted healthy revenues of approximately $730mn for the quarter. We believe increased IT spending on Cloud and Edge technology amongst corporates positions NVIDIA well for further growth across its Data Centers business.
Our view is NVIDIA has now put an end to its recent revenue declines. Their previous over-exposure to crypto data mining has been adequately addressed we feel – resulting in the company now being far less dependent on that volatile space.
Despite the stock being up almost 50% for the year – we remain positive for its growth prospects. Earnings per share were very positive, easily beating expectations – by a full 20 cents, at $1.78 versus an expected $1.58.
Investing in the Cloud
The Cloud represents a major investment mega-trend that we have identified for the next few years. It focuses on a critical subset of the technology services sector, companies that stand to benefit from the growth in the demand for these services. This includes the likes of Microsoft, which is experiencing substantial growth from its Cloud-based services, Salesforce, which is a major provider of Cloud-based facilities (starting with CRM but branching out into other areas) and less well known companies like Equinix, which is responsible for much of the ‘plumbing’ that keeps the Cloud running.
Investors seeking to access the IT sector via the FANGS or other mega-cap strategies (i.e. Nasdaq 100) will sadly miss out on this huge Cloud computing trend. The broader tech sector classification (GICS) followed by traditional indices no longer includes a number of leading tech players [5].
The mega cap FANGS provide only a very narrow exposure to Cloud. There are now Cloud ETFs that include 50 or more underlying companies – providing broad exposure to large, mid and small cap players.
Concentration risk to any one company is very limited – as the weightings for the largest mega-cap players (Amazon, Microsoft) are typically capped. This provides a lower risk product. Given the dominance of Cloud expenditure across the global IT landscape, investing in Cloud companies should now represent a sizable piece of any IT portfolio or IT sector allocation.
Anthony Ginsberg is Managing Director with GINS Global in Los Angeles and co-creator of the HAN-GINS Global Innovative Technologies (LSE: ITEK), HAN-GINS Cloud Technology (LSE: SKYY) and HAN-GINS Indxx Healthcare Innovation ETFs.
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1 https://news.microsoft.com/2019/11/14/microsoft-and-salesforce-expand-strategic-partnership-to-accelerate-customer-success/
2 https://www.zdnet.com/article/microsofts-commercial-cloud-revenue-hits-38-4-billion-run-rate-in-q3/
3 https://www.nytimes.com/2019/10/25/technology/dod-jedi-contract.html
4 https://nvidianews.nvidia.com/news/nvidia-announces-financial-results-for-third-quarter-fiscal-2020
5 https://www.msci.com/gics
(The views expressed here are those of the author and do not necessarily reflect those of ETF Strategy.)