Cloud computing business gained momentum during the pandemic as even small businesses moved their operations online. With the endgame in sight, and despite the economies opening up across the world, the majority of the people however, still prefer a hybrid mode of working.
During the fourth quarter of 2021, global cloud infrastructure services revenue exceeded $50 billion for the first time, taking the annual total figure to $178 billion – up 37% from 2020. This testifies that cloud computing gained momentum as a pandemic trend is here to stay and grow.
Global cloud computing industry to grow at a CAGR of over 19% by 2028
It is estimated that the overall global cloud computing market will grow at a CAGR of 19.1% between 2021-2028, bringing its market size to a whopping $1,251.09 billion by the end of this period. Increased internet penetration, a push towards digitalisation and advancements in technology are boosting the cloud industry. On top of it, emerging tech trends like IoT, AI and the adoption of 5G will continue to keep cloud computing in high demand.
Amazon – from online bookstore to e-retailer to the biggest cloud service provider
The fight for cloud market share is becoming interesting with Amazon (AMZN) leading the market with a wide margin. According to Synergy Research Group, Amazon Web Services occupies 33% share in the cloud infrastructure market, as of Q4 2021, that is bigger than the combined market share of its rivals Google (GOOGL) and Microsoft Azure (MSFT). In the cloud industry, the eight largest players control about 80% of the market.
Exhibit 1: Worldwide market share of cloud infrastructure service providers in Q4 2021
Amazon’s growth is largely driven by its cloud business AWS
Amazon is known for its transition from being an online bookstore to becoming the e-commerce giant that it is today. However, the company’s recent growth is heavily driven by its AWS services. In the last quarter, revenue for AWS grew faster than any other segment on a year-on-year basis. AWS sales grew by 40% on the back of higher demand for cloud infrastructure and storage solutions.
AWS is a profit generating machine for Amazon – being the sole contributor to Amazon’s operating income in the last quarter. While margins for retail business are squeezed under cost pressures, AWS offers higher margins. AWS makes money from providing cloud storage, remote computing, security and networking among others. Today, AWS is the preferred cloud services provider for organisations like Nasdaq, Facebook parent Meta (FB), Pfizer (PFE) and for even the smallest of startups.
Traditional IT up their game to cloud
Cloud computing has also disrupted the entire technology space by giving freedom of mobility, access and storage to users. Naturally, more and more conventional IT companies turn to moving their infrastructure to cloud, blurring the lines between traditional and cloud offerings. In fact, failure to adapt to the speed of cloud shift will put any technology and service provider at an increasing risk of becoming obsolete. This accelerating shift to cloud by traditional IT companies also means that the market opportunity for cloud services providers may narrow further.
According to Gartner, enterprise IT spending on public cloud computing will surpass spending on traditional IT in 2025. By then, 51% of IT spending in the four categories – application software, infrastructure software, business process services and system infrastructure markets – will have shifted from traditional solutions to the public cloud, compared to 41% in 2022. Moreover, revenue growth in traditional IT markets will be much lower than cloud, as hybrid work culture and emerging tech trends will continue to fuel cloud growth.
Exhibit 2: Sizing cloud shift worldwide, 2019-2025
Source: Gartner, February 2022
What does it all mean for cloud stocks?
Cloud services stocks came under heavy correction in 2022 due to the mounting pressure of rising interest rates on growth stocks. However, given the crucial role that cloud computing is playing in the technology revolution, long-term growth prospects of the industry are very bright. Here is a list of certain cloud stocks with their price performance over the years.
ETFs in the cloud space
Exchange Traded Funds (ETFs) provide an alternative to investing in cloud stocks. First Trust (SKYY), Global X (CLOU), WisdomTree (WCLD) and Wedbush ETFMG Global Cloud Technology ETFs provide direct exposure to cloud infrastructure and software stocks. As most of the internet companies, today, move bases of technology infrastructure to the cloud, investors can also look to broader internet themed ETFs like First Trust Dow Jones Internet Index Fund (FDN) and ARK Next Generation Internet ETF (ARKW) that will offer exposure to emerging digital trends like e-commerce, cybersecurity and blockchain along with cloud computing.
On Stockal, we also have Stacks (curated portfolios) invested in themes like cloud, AI and other internet related themes which investors can look at, with consistent returns. These stacks are a basket of stocks which are good investment opportunities for long-term investors as they help investors look at multiple stocks in a similar theme.
- Global X Disruptors Stack (CAGR of 25.55%)
- US Tech Stack (CAGR of 46.51%)
- Omni AIoT Stack (CAGR of 37.77%)
The takeaway
The cloud industry leaders like Amazon, Alphabet and Microsoft are also leaders in other tech domains like e-retail, online advertisement and software development. As part of FAAGM stocks, they are widely considered a safe investment with diverse exposure. Owing to their market leading positions, they also offer stable profits and returns in the long run.
However, investing in emerging cloud stocks like DocuSign (DOCU), Veeva (VEEV), Twilio (TWLO), among others may promise high returns but at a higher risk, as they are more vulnerable to market shocks coming from the recent interest rate hikes by the U.S. Fed.
