Profits from the cloud
One of the most promising trends in today’s market is the shift towards sharing. A lot has been written about this growing phenomenon as market winners and losers are regularly decided based upon their ability to capitalise on changing spending patterns.
The “sharing economy” has evolved out of an open-sourced community involving online transactions. The ubiquity of the internet has clearly been a game changer, enabling more timely and efficient access to goods and services. Increasingly, consumers prefer purchasing just what they need on demand. Meanwhile, companies are outsourcing routine tasks such as data management in order to focus on their core competencies.
In the sharing of goods, Uber and Lyft have made it convenient to catch a ride without the cost and hassle of automobile ownership. Airbnb provides vacationers with affordable accommodations while giving property owners a new source of income, connecting them through a user-friendly web interface.
Broadly speaking, almost any sales transaction through a democratised online marketplace constitutes a sharing event. However, some industries are leading the way while others show great promise in the years to come.
The rules of marketing and ownership are rapidly changing and investors should be aware. Customers have become increasingly fickle about purchasing some larger ticket items. Indeed, the millennial generation seems to place less value on ownership of goods. A recent study by the Harris Group found that 72 per cent of millennials prefer to spend more money on experiences than on material things.
Many in this age demographic would rather have the flexibility of renting an apartment over the responsibility of home ownership, for example. And why pay for a depreciating car when Uber is just a few key strokes away? Meanwhile, self-driving cars are on the horizon offering perhaps even greater flexibility.
In the corporate world, cloud computing as a vehicle for information sharing has been a huge success. The cloud is a platform which enables universal access to shared pools of system resources. At the same time, higher-level services can usually be accessed through this platform with minimal effort. These services are typically offered on demand, making ‘software as a service,’ or SaaS an important delivery model. Like a public utility, cloud computing relies on the sharing of resources to achieve economies of scale and efficient, centralised distribution.
An integral part of the cloud concept is allowing organisations to focus on their core business rather than expending resources on computer infrastructure and maintenance. Management may also avoid or minimise upfront IT infrastructure costs. A category of cloud utilisation which hosts those services traditionally present in on-premises data centres is sometimes referred to as ‘infrastructure as a service’, or IaaS.
Proponents claim that cloud computing allows enterprises to run their applications faster, with improved manageability and less maintenance. This enables IT teams to more rapidly adjust resources to meet fluctuating and unpredictable demand.
Since the launch of Amazon Web Services, the availability of high-capacity networks, low-cost computers and storage devices as well as the widespread adoption of hardware virtualisation, service-oriented architecture, and autonomic and utility computing has led to rapid growth in cloud computing.
Microsoft, through their Azure offering, and Amazon’s AWS are the two largest cloud companies. Not surprisingly, the stock performance of these two companies has been impressive. Over the past five years Microsoft Corp and Amazon.com Inc have generated annualised shareholder returns of 30.6 per cent and 45.6 per cent, respectively — far outpacing the S&P 500 stock index return of 13.3 per cent.
In addition to providing their well-known search engine, Alphabet Inc, parent company of Google, is also rapidly growing their cloud business. In Alphabet’s latest quarterly earnings announcement, the company reported a massive $5.5 billion capital expenditure on cloud investment. Semiconductor manufacturers, which ultimately power the platform, have also responded positively in the market to this news.
Companies which embrace the growing use of shared information services to create more efficient access for their customers are gaining on legacy companies slow to make the change. Investing directly in cloud companies and those benefiting from this growing ecosystem has been a profitable trade which will likely continue.
• Bryan Dooley, CFA is the Senior Portfolio Manager and General Manager of LOM Asset Management Ltd in Bermuda. Please contact LOM at 441-292-5000 for further information
Roland Skinner (1940-2018)
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