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Battle in the sky | why investors must watch clash in the cloud to find returns | SKYY

The substantial drop in Apple’s expected iPhone sales was enough to rattle global markets at the start of 2019, with fears over its dependence on selling products still very much at the forefront of investors’ minds.

Apple itself faces some specific challenges when it comes to changing investor perceptions about its business, with many very much still viewing it as a retailer rather than a technology giant taking a leading role in the growing cloud space.

Nonetheless, this is where attention should now be focused as more and more capital is deployed by technology giants in the cloud above all else.

In 2018, spending on cloud computing was the single largest component of all IT spending globally. In the final quarter of last year, spend on cloud infrastructure services jumped 45% from the fourth quarter of 2017, giving a full-year growth rate of 48% in 2018. In the third quarter of 2018 alone, spending rose $21bn in real terms[1].

Why the cloud matters

The cloud has become the key battleground for the world’s largest technology providers because of its increasingly widespread use.

Thanks to the explosion in interconnected devices, businesses which themselves are worth billions of dollars have been allowed to flourish. This includes Uber, Netflix and Airbnb, to name but a few. However, without cloud-based technology to support them, these businesses simply would not exist.

As the cloud becomes more reliable and secure, most businesses are also recognising it is both cost effective and the safest way to transition data storage and work environments.

Email led the move to the cloud over the last four years, but now more and more services are being transitioned over, with the solution offering companies lower costs and increased speed versus in-house platforms.

As a result, more and more individuals and businesses now rely on the cloud and whichever platform becomes dominant in this space will likely translate to the most valuable company in 2019.

Interestingly, amid a hefty sell-off across the board for the tech superstars in the last quarter of 2018, it is the giants of cloud technology holding up the best, with Microsoft currently sitting at the top of the pile at the start of the year on a market cap basis.

Who is winning?

Amazon and Microsoft, and to a lesser extent Alphabet, have all been increasing spending on cloud technology in recent years, and there is unlikely to be any let up this year.

For some businesses the revenue growth has been eye-catching, with Microsoft nearly doubling its revenues in this space since 2015.

Comparing revenues from the cloud gives an insight into just how fierce this competition is becoming. In the fourth quarter, Microsoft saw $9.6bn of revenues from its intelligent cloud business, versus $7.43bn for Amazon’s AWS (Amazon Web Services) division[2]. 

Meanwhile Apple has lagged behind its main rivals when it comes to cloud generated revenues, however, even it is spending more and looking to take a prominent role in cloud services for consumers and businesses going forward.

As the figures show, revenues from this source are reaching record levels and do not appear to be slowing down as the cloud becomes increasingly important.

However, there are a number of other players outside the top three also capitalising on the cloud phenomenon.

Among them, Cisco, Verizon and Adobe are all increasingly tapping into this market, while IBM recently paid an eye-watering £34bn to buy cloud specialist Redhat late last year which summarised just how vital this space is.

The price paid by IBM was a 60% premium to its share price, with analysts noting just how important this sector has become to some of the world’s biggest companies.

Tech specialists said the deal was necessary for IBM to stay relevant having trailed the big players for years previously. Quite simply, if such companies don’t have a cloud strategy they know their days could be numbered.

How to play it

As the IBM/Redhat deal shows, as well as focusing on the biggest names in the world, investors can focus on some of the smaller players in the cloud space whose innovation is nonetheless turning the right heads.

There are a number of ETFs offering exposure to this trend, including the HAN-GINS Global Cloud Technology UCITS ETF.

Tracking the Solactive Cloud Technology Index, made up of leading companies in the cloud-based software and services sector, the fund uses artificial intelligence screening to identify and capture opportunities.

It is clear the ETF industry is beginning to respond to this dynamic market. Innovative solutions are available to wealth managers, with the cloud one theme that will be with us for some time to come.

[1] https://www.idc.com/getdoc.jsp?containerId=prUS44358318

[2] According to figures from Statista for Q4 2018 https://www.statista.com/statistics/250520/forecast-of-amazon-web-services-revenue/ and https://www.statista.com/statistics/508993/worldwide-microsoft-intelligent-cloud-revenue-by-quarter/

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