What is cloud computing?
There appears to be no end to the lessons that we are being taught by Covid-19. One of the most salient ones is that the centralised business model – everybody hunkering down together physically under the same roof – is not the only one… and is not even necessarily the best one. As network infrastructure becomes more sophisticated and home broadband becomes faster and more reliable, models that are increasingly distributed and decentralised are becoming the norm. Indeed, many companies now see them as preferable and are scratching their heads, wondering why they are shelling out a fortune on premium office space in expensive city-centre locations. In a Covid world, they are increasingly willing to make use of cloud-based peer-to-peer software platforms for file sharing, teleconferencing and business communication. The result is that the share prices of companies such as Dropbox, Zoom Video Communications and Slack Technologies have all risen steeply since the start of the pandemic.
Although the cloud symbol was first used to represent networks of computing equipment in the original ARPANET (one of the technical foundations of the Internet) in the early 1970s, it was not until 2006 that the term “cloud computing” was popularised by Amazon with the release of its Elastic Compute Cloud. Today, it is ubiquitous and the concepts and technologies underpinning it form part and parcel of our everyday lives. Big Data, Amazon Web Services, Blockchain, hosting and storage services like Google Drive and OneDrive… it’s all happening in the cloud.
Moving to the cloud post-Covid
One thing that Covid-19 has not changed is businesses’ need for productivity and up-to-date computing systems for maintaining efficiency. Cloud computing streamlines the ways in which they operate by enabling staff to share documents over the Internet and work on them together. Business data can be edited wherever they are, and that data is not stored in a single physical location (where it might run the risk of getting lost or damaged).
Cloud computing solutions can be scaled based on number of users, storage space needed and features required. This keeps data management costs down and minimises the need to purchase equipment or employ people to install and supervise it. Businesses that implement it end up being significantly more agile and flexible. Then as they grow, further capabilities can be introduced as and when necessary (rather than having to purchase and keep extra licences before they are actually required). Backup data storage facilities are not needed – any data saved to the cloud is secure and can be accessed via an Internet connection, which ensures business continuity even in the event of on-site data loss.
Initially, the “cloud” was just basic infrastructure. Then it became the platforms on which businesses built applications and software used directly by employees. But the world in which we live today is one in which applications are written for the cloud. Indeed, these applications “live” entirely in the cloud. Some companies have even developed cloud-based business models for its old applications (a version of Microsoft Office, for example, can be accessed via a web browser).
When IQ decided to buy into the First Trust Cloud Computing ETF, it saw it as an ideal opportunity to establish a foothold in this area, but to do so with the least risk.
The index provides thematic exposure to companies that are actively involved in cloud computing and selects its constituents from a global pool of securities that have at least US$100 million in assets under management. Securities with exposure to the cloud computing theme are then classified according to the following three business segments: pure-play companies – publicly-traded companies which focus their efforts and resources on only one line of business and which are direct service providers for the cloud, actively supporting and developing cloud technology; non-pure-play companies – companies which are focused outside the cloud computing space but provide goods and services to support the sector; and technology conglomerate companies – large broad-based firms that indirectly utilise or support the use of cloud computing technology.
Ten percent of the index weight is allocated to technology conglomerate companies. The remaining 90% is allocated between the pure-play and non-pure-play segments according to their relative market capitalisations. Constituents making up each segment are equally weighted, and reconstitution and rebalancing occur semi-annually.
At IQ, we see the First Trust Cloud Computing ETF as an efficient and innovative way to capitalise on this growing Covid-catalysed demand for the global public cloud market, and if it is up 38% this year, it’s because this is a high-growth industry that has benefited enormously from the pandemic. Valuations are… well, up in the clouds, and pullbacks are certainly possible. But the technology is resilient and probably has more in the way of staying power than “flash-in-the-pan” stocks that hatch and die like mayflies. Companies will not discard the benefits that they are leveraging from cloud apps once people flock back to their offices (if they ever do). So this growing market should continue to constitute a sound investment opportunity for years to come.
Zoom Video Communications, for example, perfectly illustrates what cloud applications can do for a portfolio – it is one of the best cloud stocks of 2020. Indeed, the pandemic has turned Zoom into a cultural touchstone: at only nine years old, it has already joined the likes of Skype and WhatsApp in becoming a verb!
Needless to say, growth in share prices is also fuelled by mergers, acquisitions and takeovers. The values of smaller companies are immeasurably enhanced when they are gobbled up by the FANGS (Facebook, Amazon, Netflix and Google) of this world.
21st century utilities
Two or three generations ago, water, gas and electricity established themselves as the three must-have utilities. As the boundaries between work and play become more and more blurred, as we become increasingly untethered from the traditional 9-to-5 regime and as we continue to assert our right to structure and organise the way in which we work as we see fit, we are going to find it increasingly necessary to pool computing resources – everything from raw computer power to application functionality.
Nowadays, companies engaged in delivering next-generation connectivity that has the power to enable this pooling of resources – while at the same time improving lives and transforming businesses – really are the new utilities companies.
Peter Lowman is the Chief Investment Officer at Investment Quorum, a Director of the company and an integral member of our investment committee.
This article does not constitute specific advice and investors should bear in mind that capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.
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