Cash clouds

While digital transformation has been a business buzzword for a number of years, the COVID-19 crisis has forced it to the top of companies’ agendas. Many businesses have had to fast track their digital strategies in order to adapt to the work-from-home shift.  

Cloud computing has been one of the big corporate winners of 2020 so far, despite the coronavirus pandemic. Between April and June, the Global X Cloud Computing ETF [CLOU] gained over 52%. In comparison, the S&P 500 Information Technology sector rose 30% during the same period. 

Amazon [AMZN] leads the cloud computing conversation. According to research published by the Synergy Research Group earlier this year, the company is the industry’s top vendor with the biggest market share of around a third.

Revenue for Amazon Web Services for Q1 2020 was $10.22bn, a 33% increase on the $7.67bn posted in Q1 2019. It was, however, slightly down on Q4 2019’s 34% year-over-year rise. Overall, the company’s cloud revenue growth has been slowing since the third quarter of 2018, Statista data shows.

  

It’s a similar story for the second-biggest vendor by market share, Microsoft [MSFT]. Revenue from its Intelligent Cloud segment for Q4 2020 rose 17% to $13.4bn, while Azure’s growth rose 47%. Although this beat analyst expectations of $13.11bn, it marked another quarter of reduced cloud computing growth. 

The slowdown may have continued regardless of the pandemic, but it hasn’t been helped by the fact that 2020 IT budgets have been slashed by 8% globally, according to Gartner. Microsoft does, however, expect spending on public cloud services to grow by 19% in 2020.

 

Every cloud has a silver lining

Despite the IT spending clampdown, other areas of cloud computing have soared during so far in 2020. The demand for cloud-based conferencing is so high that Zoom [ZM] has revised and doubled its full-year revenue forecast to $1.8bn, up from $623m in 2019. With employers relying on communications software to allow staff to work remotely, Twilio [TWLO] is another cloud communications stock that has seen a surge in sales during the pandemic.

  

Even small-cap cloud computing stocks such as Workiva [WK] and Rapid7 [RPD] have seen an uptick in customers, boosting total revenues 14.1% year-over-year to $83.9m and 25% year-over-year to $98.9m in their respective second quarters.

A number of these companies offer products and services on a subscription basis, and their future growth will depend on whether organisations renew or cancel subscriptions as offices start to open up again post-coronavirus. That said it is likely that many businesses will embrace remote working in some form over the longer-term. 

Cloud-based telephony and messaging is expected to be up 8.9% by the end of the year, with cloud-based conferencing expected to rise 24.3% in the same period. Gartner has also suggested that the total cloud spending levels it was forecasting for 2023 and 2024 could be met as early as 2022. 

“We’re going to continue to own the companies we think are the best-in-class for the next five and 10 years and that have significant upside from here” - Dennis Lynch

 

Dennis Lynch, head of Counterpoint Global at Morgan Stanley Investment Management, believes that cloud computing requires investors to look to the far-horizon rather than making decisions based on short-term volatility. Counterpoint Global recently added two cloud-based software businesses — Veeva Systems [VEEV] and Amazon — to its top holdings.

“We’re going to continue to own the companies we think are the best-in-class for the next five and 10 years and that have significant upside from here,” Lynch said.

 

This article was originally published in our Opto Magazine. You can purchase your copy via our Opto Shop.