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Cloud Computing ETF Investment Outlook 2020 | SKYY

Cloud Computing ETF

As we begin a new decade, cloud computing is a technology sector which is quietly capturing the imagination and allocation of investors. Cloud computing does not make headlines in the same way as robotics or artificial intelligence, but with the cloud market expected to account for over 70% of all technology and software spending this year [1], it is becoming an investment opportunity too significant to ignore.

In this article, we look at the big cloud news of 2019 and consider if 2020 could be a headline year for investors in the cloud technology sector:

Cloud is Changing the Way We Live and Work

Cloud is adopted across almost every existing industry as it can help businesses gain big cost-savings, mitigate risk, improve security and provide flexibility in the way information is stored and shared. Cloud technology is also critical to the formation and scalability of many new headline-grabbing technologies like Artificial Intelligence, Self-Driving Cars, Social Media and the Internet of Things.

Today it’s virtually impossible to find any organization that doesn’t rely at least partially on cloud services, or any home that does not feature some form of cloud-dependent device. From software, operating systems and databases to servers, IP addresses and cyber security – the cloud seems to have something for everyone.

Since cloud technology was popularised in 2006 with the release of Amazon’s ‘Elastic Cloud Compute’, cloud has grown to become a socially and economically transformational infrastructure on par with the canals, railways, pipelines and telegraph systems of yesteryear. Cloud is quickly changing the way we do business and the type of business that can be done.

Power of Clouds

Cloud’s power comes from its unique position at the heart of the ‘Fourth Industrial Revolution’ – a term coined by The World Economic Forum2 to describe today’s economy where many data intensive, digital technologies are combining to create an accelerating, virtuous cycle of disruption.

“We stand on the brink of a technological revolution that will fundamentally alter the way we live, work, and relate to one another. In its scale, scope, and complexity, the transformation will be unlike anything humankind has experienced before… The possibilities of billions of people connected by mobile devices, with unprecedented processing power, storage capacity, and access to knowledge, are unlimited.”

Cloud sits in the middle of this transformation - new technologies, business models and entire industries are enabled by, and reliant on cloud to operate, share and scale. Artificial Intelligence, Autonomous Vehicles, Quantum Computing, Genomics and ecommerce, Cyber Security, 5G, blockchain, Internet of Things and robotics- all are just the tip of the iceberg for clouds’ importance and applications.

Cloud Computing Growth is Sky High

Cloud computing is on a high growth trajectory, expected to account for over 70% of all technology and software spending this year [3] . Gartner forecasts cloud revenues forecast to jump from $226 billion to $350 billion by 2022 [4].

Cloud has become a high-growth revenue generator for many of the world’s largest companies - In 2018, Amazon Web Services was utilized by 64% of cloud users -that number was at just 57% a year earlier. AWS now represents over 67% of Amazon’s total operating income [5]- more than Kindle, Amazon.com, Prime Video, Amazon Music, Audible, Alexa and Whole Foods combined.

Microsoft’s Azure platform has had a huge impact on a huge company - now contributing over a third of the company’s revenues, [6]  and witnessing adoption grow from 45% in 2018 to 52% in 2019.

For the first time Google broke out its Cloud unit's revenues, showing impressive 53% gains in 2019 over 2018. ($8.9bn vs $5.8bn).

The Clouds Gather: Large Cloud Players Continue to Expand Beyond Infrastructure

  • About half of all companies spend over $1.2 million a year for public cloud service. 13% of companies are big spenders, with an annual public cloud spend exceeding $12 million a year. (Source: RightScale)
  • 60% of North American enterprises use public cloud platforms. Five years ago, this was at just 12%.(Source: Computerworld UK)

Given the current anti-trust sentiment towards Big Tech in the US, we do not see the large cloud infrastructure players being able to engage in significant M&A activity in the IaaS area of Cloud. By contrast, we expect increased activity in the PaaS and SaaS area (platform & software as a service areas).

Increasingly IaaS (infrastructure as a Service) and PaaS (Platform as a Service) players will move into the SaaS area – both organically and via acquisitions.  Outsourcing more sophisticated analytics and middle office operations to the Cloud is already occurring.  The evolution of Cloud beyond simple back office tasks is helping to drive significant Cloud revenue growth. 

As the Internet of Things propels huge growth in the number of connected devices, the Cloud will become the backbone for the latest technological revolution involving mobile devices, smart cars, smart homes, smart offices and smart factories.

Oracle and other business enterprise software leaders are positioned to benefit the most from the growing use of Cloud Technology.  Salesforce recently buried the hatchet with Microsoft and will now all corporate customers to access Salesforce CRM software – via Microsoft’s Azure Cloud infrastructure.

These large business software players, are positioned to power more cloud software, platform and cybersecurity acquisitions in the coming year. We see history also repeating itself in the IT business. As with Microsoft’s MS DOS & Windows software proving hugely disruptive to mainframe computing, we now see Cloud’s business applications and software ultimately also growing far faster than the pure Cloud infrastructure players. 

“…As A Service” Poised to be Revenue Rocket Fuel

  • IaaS (Infrastructure as a Service) is expected to reach $72.4 billion worldwide by 2020.(Source: Lastline)
  • PaaS (Platform as a Service) investment grew to 56% in 2019. Up nearly a quarter since 2016.(Source: Forbes)
  • In 2020, SaaS (Software as a Service) is predicted to grow with an 18% CAGR, according to a quote by Bain & Company.(Source: Forbes)
  • SaaS now adds $20 billion to the quarterly revenues of software vendors. This is expected to increase by around 30% a year. (Source: Trend Micro)

Licensing Cloud Apps and software globally is becoming the next growth stage for Cloud Technology as companies in this space stand to benefit from the rollout of the global cloud infrastructure. We expect cloud’s evolution to include numerous acquisitions in the SaaS and PaaS areas. In 2019 we already saw important examples of this with IBM’s acquisition of Red Hat last year ($35bn) being the largest such example.

As costs continue to fall, cloud will permit ever smaller companies to benefit from enterprise applications offered by the likes of SAP, Oracle and Salesforce, broadening the user base.

Summary

Cloud computing is currently the key battleground for Big Tech players. According to Gartner Research over 70% of all IT technology and software spend is focused on the Cloud market. With the growth of both public and private cloud platforms and infrastructure – the sharing of data across multiple clouds is set to grow exponentially.

While cloud already underpins many of the technologies, we use day-to-day, we are only scratching the surface of how it can be applied. Our need for data management and storage is only going to grow and so is the demand for smarter, faster, lower cost and more accessible services and information. Over the short-term we see cloud continuing to drive technology sector revenue growth, and over the long-term see cloud being a critical component of the global economic and social transformation that is the Fourth Industrial Revolution and an attractive long-term thematic allocation for investors.

Cloud Technology ETFs: SKYY

In 2018, HANetf and Gins Global launched The HAN-GINS Cloud Technology UCITS ETF (SKYY), enabling investors to gain exposure to the top 50 cloud companies across Developed and Emerging markets. SKYY tracks a rules-based index that uses artificial intelligence to identify and select companies involved in the field of cloud computing.

Calculated by Solactive, the index includes cloud infrastructure companies as well as cloud software producers, equipment and service providers. A full list of holdings is published here

HAN-GINS Cloud Technology UCITS ETF is issued by HANetf and listed on London Stock Exchange, Borsa Italiana and Deutsche Boerse XETRA with a TER of 75bps.

Investors' capital is fully at risk and investors may not get back the amount originally invested.

Article Date: 15th April 2020. 

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