Cloud Computing: Complete Investors Guide: Cloud computing is currently fueling a global data revolution, with businesses frantically racing to achieve their digital transformation goals ahead of their industry rivals. Indeed, so rapid is the process of this “cloud migration“, that many experts are predicting the ecosystem could be worth up to $1 trillion in run-rate EBITDA for the Fortune 500 companies by 2030.
Although most people will be familiar with the term by now, it’s not always obvious what exactly cloud computing is. And, unless you’ve had direct experience with any one of the various cloud services that are available, you might not fully grasp what benefits it can bring to a business.
So, in this article we’ll give you a detailed explanation of what precisely cloud computing really is, and explain why it’s in such high demand right now.
Furthermore, for investors who want to gain exposure to this rapidly growing industry, we’ll examine some of the most popular models used to deploy the cloud to its end-users, as well the companies driving the cloud transformation forward. So, with that introduction done with, let’s begin.
What Is The Cloud?
The term “Cloud” is a metaphor used to denote the network of computer servers that, when arrayed together, constitute a single, global ecosystem.
On their own, each server normally fulfills just one unique function. However, when they are connected with one another in the cloud, their capabilities become much more powerful, allowing users to run intricate applications, such as hosting social media websites, or delivering video-streaming services over the web.
In addition to describing the physical hardware that makes up the cloud, the word can also include the software and storage modules that are hosted on the individual servers too.
The servers themselves are housed in data-centers located all across the world, enabling companies and organizations to access their data and applications from literally anywhere on the planet.
Cloud computing itself is only made possible by the use of a technology called virtualization. Virtualization permits cloud providers to create “virtual” copies of hardware, software and databases, allowing users of the cloud to access just those parts of the platform as and when they need it.
The cloud can be further subdivided into four different categories:
- the public cloud,
- the private cloud,
- the hybrid cloud, and
- the community cloud.
Businesses can choose which one to use depending on their present needs. For instance, some companies might need to meet certain regulatory compliance requirements, for which a private cloud could be the best fit, especially if a single-tenant environment is preferable for security reasons.
Why Was There A Demand For The Cloud To Begin With?
When it first arrived, cloud computing was actually a fairly simple solution to what was, at the time, a very complex problem.
For example, in the past, it was up to individual organizations to run and maintain their own vast network of differentiated IT infrastructure projects. These were mission-critical undertakings, and were needed to power the computing and data-siloing needs of the company or institution in question.
This infrastructure included hardware and software components, as well as storage elements that each had to be maintained and updated by specialist engineers.
The upkeep of all this machinery was complex and expensive, only becoming more so as the systems evolved into ever-increasingly sophisticated and technologically-advanced operations.
Not only did this legacy infrastructure have to grow with the increasing demands that enterprises were asking of it, but these work flows had to be merged with often new, incompatible platforms.
Fortunately for IT departments, a fledgling industry was about to come to their rescue. The introduction of cloud computing brought with it many improvements, and effectively ended the old way of doing things.
Advantages Of Cloud Computing
Cloud computing is now a mainstay of the modern, hyper-connected world we live in, proving itself a powerful, and increasingly necessary, tool for companies across all business sectors.
In fact, the technology comes with a whole host of benefits that its legacy forebears couldn’t even hope to match. For instance, not only does the cloud not require the expensive upfront capital expenditures that older systems required, it also makes it possible for enterprises to pay for their cloud-usage on a subscription basis – which is particularly helpful to small and medium-sized businesses that hitherto had no means of running their own heavy computing operations.
In addition to the many cost saving efficiencies that cloud computing brings, there are other crucial advantages that it offers too. Flexibility is one obvious example, giving businesses the option of not being tethered to a single geographical location. Rather, employees are free to go and meet with clients wherever it is most appropriate, while still having access to all their company data. Remote working is another aspect of this flexibility, a situation that received new impetus in light of the recent lock-downs.
Furthermore, the cloud makes organizations more agile, reduces downtime, and can be deployed without extensive technical knowledge. It also provides a robust safeguard if and when disaster strikes, allowing companies to get back online without the catastrophic loss of data or functionality.
How To Invest In The Cloud
One strategy to capitalize on the growth of the cloud is to invest in companies that are involved in the industry in some way, either through purchasing individual stocks and shares or, if you prefer a more diversified approach, through an ETF that tracks a wide variety of cloud and cloud-related businesses.
Because of the ubiquity of the cloud, you might be overawed by the sheer number of companies that are exposed to the cloud today. A good way to filter your options would be to narrow down your choices depending on the cloud service model a firm uses to host its business.
In general, there are three main service models used in cloud computing:
We’ll take a look at every one of these in turn, and examine a publicly-traded company that utilizes each particular service model for its own operations.
Software-as-a-Service (SaaS)
Software-as-a-Service (SaaS) refers to businesses that use the Internet to deliver their applications to their clients via a third-party vendor. These are normally accessed directly through a web browser, and don’t generally require any set-up, installation or download on the user side.
Because this kind of delivery is managed from the third-party vendor’s central location – and therefore the vendor is responsible for managing any behind-the-scenes technical issues – companies and their employees can save money and free-up time by focusing on important tasks rather than fixing glitches and upgrading and managing the software itself.
One of the biggest SaaS application providers is the cloud-based customer relationship management firm, Salesforce (CRM).
Salesforce has a commanding market share in the space, having been ranked the #1 customer relationship management provider for the eighth consecutive year.
Currently, the business takes 23.9% of the available market, easily eclipsing rivals such as Adobe (ADBE) and Microsoft (MSFT) who take less than 6% a piece. In fact, the company is so well regarded, that the business can boast 90% of the Fortune 500 as Salesforce customers.
The company markets a wide range of applications, including its Sales Cloud product, featuring tools for territory and partner management, as well as sales forecasting and lead development.
Salesforce nearly doubled its revenue from $13.3 billion in 2019 to the $26.5 billion it stands at today. It’s also the fastest growing of the top five enterprise software companies, and increased its operating cash flow in the fourth quarter FY22 by 25% to $6.0 billion.
Despite Salesforce’s share price having corrected by 35% since the start of the year, the company still represents a strong buy. The business trades at its lowest sales multiple in 5 years at 5.95x, and, with a sector-beating gross margin of 73%, there’s a lot for investors to be optimistic about for the future.
Platform-as-a-Service (PaaS)
Unlike SaaS applications – which deliver fully formed products to their customers – a Platform-as-a-Service (PaaS) is normally used by developers as a tool to create customized applications out of.
In this case, the vendor manages the back-end servers and storage, while the users maintain management of the actual application that they are developing.
A PaaS application has the advantage of giving the client a simple, scalable and cost-effective solution for developing and ultimately deploying their applications, without having to worry about maintaining the underlying software.
Microsoft Azure is a popular example of a PaaS that offers simple cloud-based applications to developers working on more complex, cloud-enabled projects of their own.
The product integrates server, networking, middle-ware and storage development tools into one complete infrastructure, from which a user can then host their finished work.
Microsoft’s overall cloud revenue was up 32% year-on-year in the third quarter 2022, with “Azure and other cloud services” up even more at 46%.
And although Microsoft currently lags behind Amazon Web Services in terms of total revenue generated, it’s catching up.
In fact, AWS grew at a slower rate than Azure’s cloud offerings at just 34% annually over the last two years, signaling that Amazon now has a serious competitor in the battle for cloud superiority.
Infrastructure-as-a-Service (IaaS)
Another way that cloud computing companies deliver their products and services is through the Infrastructure-as-a-Service (IaaS) model.
A major provider of IaaS solutions is DigitalOcean (DOCN). The company provides content hosting services, and is seen by many as a low-cost option for those needing across-the-board cloud functionality. Indeed, the firm calls itself “the Developer Cloud”, and it’s easy to see why.
To begin with, DOCN is a relatively small IaaS company, which pitches its services mainly to small to medium-sized businesses (SMBs), as well as individual developers that can’t afford enterprise-scale cloud access.
In fact, this is the problem Digital is trying to solve: how do you deliver a highly differentiated set of offerings that are simple to use, come with live, personal support, and don’t lock users into a proprietary stack of applications for the length of the developer’s product lifespan?
Indeed, DOCN’s answer to this is multiform, with a range of solutions including simple, scalable virtual machines called Droplets, all the way through to its Managed Kubernetes, which enable developers to automate and coordinate their software deployment.
Like most tech stocks, DigitalOcean has seen a big draw-down on its share price since the end of last year, falling over 60% from its all-time high in November 2021. But the business is actually thriving. Its revenue growth was up 36% year-on-year in the first quarter, while its total customers also grew 6% as well.
Most importantly, however, for a subscription-based IaaS provider, DOCN’s net dollar retention rate was 117% for the quarter, up 1000 bps from the same period last year. Its average revenue per customer also increased 28% to $68.90, while its annual run-rate revenue was up 35% at $524 million.
DigitalOcean believes it has a sizable opportunity in a growing marketplace, with an estimated 43 million developers and 100 million SMBs globally making up its potential client base by 2025. The business currently enjoys a year-on-year operating cash flow growth of 88%, which should hopefully help it along the path to becoming a profit-making outfit in the not-too-distant future.
Cloud Computing Investor Guide Conclusion:
So there you have it. The cloud is a simple network of interconnected servers that has huge utility for streamlining business processes in a range of organizations. There are many companies involved in exploiting the benefits of the cloud, and it’s very likely we’re just at the start of what will become one of the most important technological revolutions of our lifetime.
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