With week 1 of the Trump Era under our belts, the Dow has plowed through 20,000 and the NASDAQ has already delivered 5% YTD. Let’s get this straight: amid border adjustment tax talk, cash repatriation possibilities, trade tariff implementations and Twitter-wars, all sorts of issues could have highly, highly material impacts on earnings – positive or negative – for the S&P 500.
Wall Street, it seems, isn’t too worried about the negatives.
Sure, we get it. Consumer confidence, small business optimism, home price rebounds, affordable gas prices, and pretty lucrative earnings projections among other factors definitely warrant some optimism. But don’t they get balanced out with expensive valuations, tightening monetary conditions, and protectionist agendas – including trade wars with neighbors?
No good answer here. You’ll need to be a political expert if you want to win by trading stocks in 2017 – a year likely to be remembered as the time Washington took over Wall Street and left everyone exhausted.
Anyway, life goes on for the long-term investor. This month, the focus here at EconomicStreets is on the cloud – an apolitical, non-geographically bound concept that has revolutionized the world – whether you realized it or not – and is barely in its infancy in terms of application. Here are my thoughts on how the cloud is taking society to some amazing frontiers, and why investors should pay close attention.
To begin, let’s clarify the concept. References to the cloud are all over the place. What is it? In essence, cloud computing involves the use of centralized servers for the storage of data, which can then be accessed any time, any place, and over the internet instead of through your personal hardware. Therefore, the cloud is the foundation of business models that rely on on-demand access to these centralized computing resources, which provide servers, storage, applications, networks and analytics – and are managed by parties other than the client; as a result, the client can go back to pursuing his or her ideas without having to worry about all of the capex, scalability concerns and other issues that prior-generation entrepreneurs likely faced. So, it’s pretty amazing and incredibly revolutionary – and the concept, as a whole, can basically be likened to the internet. Several entities, including the Department of Defense and CERN (the European Organization for Nuclear Research) get credited for pioneering the internet; the cloud, meanwhile, has its roots with Salesforce, Compaq, Amazon and other corporations. That’s some serious value-addition by for-profit enterprises.
Before we get into that, let’s talk market sizes to understand the relevancy. Estimates vary; the cloud has essentially been around since the late 90s, and took off over the years as the asset-light, idea-intensive tech revolution gathered steam – along with the reach of cloud solutions providers such as Amazon Web Services, which made it amazingly accessible to everyone. Gartner predicts a +17% growth rate to $208 billion for public cloud services this year, and with all signs pointing towards continuing growth, estimates show that nearly $1 trillion in IT spending will be directly or indirectly affected by companies shifting to the cloud during the next five years. Firms including Cisco (CSCO), IBM (IBM), Microsoft (MSFT), Oracle (ORCL) and IT services and providers – think Infosys (INFY), Wipro (WIT), and others – have all had to rapidly change their business models to cater to this new age: one where companies don’t own, but instead rent hardware, and prefer outsourcing IT needs to specialized cloud firms rather than just becoming all-encompassing companies with back-end hassles and mediocre outputs. There were several decriers of the concept as it grew, including Larry Ellison and Apple’s co-founder, Steve Wozniak; the worries included the potential for mass-crashes and lucrative hacks given companies would now trust third parties with their data. It hasn’t panned out: data breaches continue to hit the news, but the cloud hasn’t had anything to do with most of them. From a consumer’s perspective, life online, in fact, has gotten pretty great. Ever lost your iPhone? Rest assured that your photos aren’t going anywhere…because they’ve already been backed up on the cloud. Collaborated on Google Docs? That’s the cloud at work. Watched Netflix? The company is renting out Amazon’s cloud products and services. How about checking out your customer analytics or using internal company chatter? You’re likely going through Salesforce’s cloud platform. A guy named Drew Houston forgot his USB drive during a trip from Boston to New York back in 2007, and came up with an idea for storing files online. Thus, Dropbox was born – and it’s worth nearly $10 billion bucks today. AirBnB co-founder Nathan Blecharczyk hosted the site on Amazon Web Services during its inception in 2008 – providing a massive cost saving, as noted in Businessweek, which would help the company get off the ground. India’s Aadhaar project, a tech initiative to provide electronic IDs to the entire population, is a cloud-based system which has now registered 99% of its citizens and is actively being used to open first-time bank accounts. Enough said: the cloud has been the backbone of all sorts of amazing progress and ideas – barely a decade and a half in.
Importantly, Wall Street is paying attention. Microsoft’s Azure (its cloud computing service) showed a 93% growth rate last quarter, and received more press coverage than any other segment when it reported results last week. Amazon’s (AMZN) profitability has been nearly completely driven by Amazon Web Services, and it has a solid 30%+ market share in the field; patient investors have multiplied their money many times over since it launched. Cisco (CSCO) and Citrix (CTXS) have been dominating the communications-as-a-service concept, with a highly watched change of their business models to adapt to the new industry. In other words, all – absolutely all – of the larger players have pivoted to the cloud, and smaller, specialized ones including VMWare (VMW), Workday (WDAY), Salesforce (CRM) and others have carved out solid niches. Some of the firms aren’t profitable yet, but investors have faith in the potential; the BVP Cloud Index encompasses a strong list, and has returned over 180% since Jan’11, over double the returns of the S&P 500.
What it means for you: Today, we’re looking at a world where there is hardly any internet-based activity that isn’t using the cloud in one way or the other. Scaling your business on demand, collaborating on ground-breaking research with scientists worldwide, enhancing political transparency through electronic records – all of this random, amazing stuff and more can be done through this platform. So if anyone says the future is dark, think again – because looking up to the cloud, things are looking extremely bright. We’re only getting started with the applications of this computing frontier. Technology has paid amazing dividends to society over the decades, and investors should take note: by embracing the cloud, Wall Street, along with the world, will gain handsomely in the years to come.
