Is the ‘cloud’ an investment silver lining?

When investigating what the Age of Transformation means for investors, it’s easy to focus on the mega trends driving significant economic change: the rise of China, the need to tackle climate change and address inequality, and the consequences of a growing global population.

Underpinning many of these themes is the disruptive potential of technology; the assurance that innovation will ultimately provide the solutions needed to address many of the world’s current and future challenges. Yet, while many of us are looking ahead to this digital revolution, cloud computing has subtly been laying the groundwork for businesses to start adapting now.

And for investors, cloud computing is a long-term structural trend that can be mined for opportunities in the present.

Cloud computing essentially is an on-demand delivery service for IT resources.

Where companies, governments and organisations had previously bought and maintained their own technology infrastructure (such as servers and data storage centres), cloud computing means that these services can be outsourced via the internet on an as-needed basis.

By signing up to cloud computing’s pay-as-you-go model, companies can access an operating system that is scalable and flexible, and is regularly updated to reflect the latest software and hardware innovations. In short, it enables companies to be fit for a changing future.

Cloud computing first exploded within the commercial world during the pandemic, as its virtual business offering neatly harmonised with the sudden demand for remote working. Yet, overall worldwide adoption is still very much in its infancy and the growth potential remains significant as it seen as the powerhouse that will drive business’s forthcoming digital transformation. Worldwide end-user spending on public cloud services reached USD410.9 billion in 2021 but is forecast to grow 20.4% in 2022 to USD494.7 billion and should reach USD600 billion in 2023¹.

From an investment perspective, seeking out those companies developing cloud services represents just one aspect of the cloud opportunity, albeit one with attractive growth prospects. Beyond the technology sector, adoption of the cloud can enable a company to change or accelerate its business by saving on costs, improve operational systems, gain access to real-time data, tailor their customer experience and generally enhance efficiency.

When you look at any sector, it is those companies that invest the most in their systems, that are willing to be innovative and embrace new technologies that tend to have the best products and services. So for investors looking for a best-in-class company these days, identifying those with cutting-edge IT systems, and that includes cloud computing, should be a prerequisite.

Cloud computing providers are doing their best to facilitate this transition by forensically examining the value chain across every sector in the economy to see how the cloud can create new efficiencies. Consequently, the product suite of services has expanded dramatically over the last five years – it is now more about software and app development than merely outsourcing IT hardware.

With cloud computing’s potential to make other technology lighter, faster and more accessible, it is set to be the backbone of other digital services such as social media, gaming, autonomous cars, the internet of things and will be further enhanced by upcoming ultra-fast networks such as 5G.

The ongoing improvement in cloud services is already seeing this technology split into different service components such as Infrastructure as a service (Iaas); Platform as a service (Paas) and Software as a service (Saas). However, there are many other areas that will benefit from the growth of cloud computing:

• Storage capacity: in a world where the volume of data is increasing rapidly, many companies are turning to the cloud where greater capacity can be facilitated. And the price of such storage is coming down as competition rises.
• Security: amid the rise and sophistication of cyber-crime, cloud providers can often provide better security measures than individual companies.
• Tailored customer experiences: as customers become more demanding, using the cloud to improve interaction with clients through feedback apps and having a closer association with them will be advantageous.
• Artificial Intelligence (AI): AI services and machine learning platforms require huge processing power and data bandwidth – the availability of cloud datacentres means that AI capabilities will be accessible for a much wider audience.
• Function as a service (Faas): the serverless cloud is a newer concept that will mean businesses no longer have to maintain their own server systems and can access greater server capacity at the pace required by their business rather than being dictated by operational expenditure.

For many businesses, the use of increasingly powerful computing engines consumes a significant amount of energy. Incorporating the cloud into technology operating systems not only reduces costs in terms of the hardware and software required but will also significantly lower a company’s energy footprint. A company’s savings from switching to the cloud can be as much as 30-50%² . These are funds that can then be used to invest money elsewhere, such as improved Environmental, Social and Governance (ESG), research or product development.

The cloud also enables companies to create much more data across all parts of their business, providing the opportunity and awareness to make operational improvements that lead to far less wastage in the system, which will not only be good for the environment, but is also a positive for governance and will benefit consumers.

It is often impossible for investors to filter out day-to-day ‘market noise’, particularly in the current complex investment environment. However, long-term structural trends are also a robust source of opportunity.

Cloud computing represents one such trend, offering many advantages to both public and private sector users of its services and for investors looking for a multi-billion dollar industry where growth is still in the early stages.

At BNP Paribas, we believe cloud computing is not just a technology story but one that spans every sector, industry and geography, and will underpin the solutions to the long-term structural changes our world currently faces. In our view, it will be those companies embracing all that the cloud can offer that will prosper and be the market leading businesses of tomorrow.

And our open-minded investigative investment approach seeks to unearth the many opportunities within this rapidly expanding and innovative theme.