An Arms Race in the Global Cloud
How to Profit From the Competition For Dominance in Cloud Services
Unless you work in IT, you probably don’t think a lot about Cloud Computing.
But Cloud Computing thinks a lot about you.
In fact, pretty much everything there is to know about you exists in data silos around the world.
The Cloud delivers what you watch on Netflix, comments from your friends on social media, allows Siri to give you directions, immerses you into online multiplayer gaming, and soon will even tell your refrigerator when it’s time to buy more eggs.
In 2017 the Cloud is everywhere. It holds most of your personal information, and delivers most of the applications and information you use every day.
It is also about to revolutionize every single device you own, including your TV, appliances, cars, furnace, hot water heater, stereo, wristwatch … and the list goes on.
In the very recent past, the Cloud was primarily a means for companies to store data, and build mainly Business to Business (B2B) computer programs.
THE BIRTH OF THE CLOUD
A decade ago I worked at a company that dove headfirst into cloud computing. It was, perhaps, a bit ahead of the times.
The company worked with news media organizations, providing a mobile app that could quickly edit video on a smartphone, and deliver it to their servers, known as Media Asset Management Systems.
But smartphones couldn’t render video in the format used by many of our customers, and also couldn’t insert the tracking data they needed.
So, we used Amazon Web Services’ Elastic Computing Service. Our program fired the separate bits of video into the cloud, rendered it into one complete video, inserted the tracking data, and dropped it into the customer’s media servers.
At the time it was pretty groundbreaking stuff.
Today, it’s like watching a caveman scratch on a rock with a stick.
CLOUD SERVERS ARE TAKING OVER THE INTERNET
When we delivered that service, most companies including our customers hosted all of their content and their computer programs on their own servers, or on local server farms.
For example, I play an online multiplayer video game with four million people around the world. The gaming company has servers in North America, Europe, Russia, and Asia.
But those servers are expensive to manage, and they have to be updated constantly.
More and more, companies are opting to put both their data and their computing programs on cloud services.
While the Cloud has been around for a long time, the true impact of Cloud computing is just beginning.
Cloud services started with Amazon in 2006, and this year will top $146 billion in revenue for the sector, and is growing at a 22 per cent compound annual growth rate. By 2020 cloud services will surpass $240 billion!
THE CLOUD WILL TRANSFORM YOUR WORLD IN A DECADE
Ten years from now, the world will be a radically different place as smart devices are connected to cloud data centres.
Just for example:
Cloud data such as maps and feedback from embedded devices in highways will guide self-driving cars and trucks, even through a blizzard.
The cloud will update your supermarket of items you need as they are used up, and have those items ready for pickup, as well as anything you might order.
Virtually every device in your home will be controlled by your voice, from your furnace, to your window blinds, your stereo or your vacuum cleaner. It will be like living on the USS Enterprise in Star Trek.
Your interconnected speakers will also let you get any information you want simply by asking the question. Want to know how much energy it takes to boil a litre of water? Just ask Alexa or Siri.
Companies will be able to track the location and state of every product they’ve produced, automatically.
Companies will be able to predict demand and production runs for their products, by knowing automatically when their customers run out of that product. For example, a clothing manufacturer will automatically produce and ship certain T-shirts as a retail chain starts selling out.
Service companies will know in advance when a device they manufacture is close to failure, and can send out a service rep to fix it before it breaks.
Your car will let you and your mechanic know when it needs servicing or repairs.
Pharmacies will be able to refill a prescription as you come close to running out of the supply at your home.
Retailers will be able to analyze your buying patterns, and automatically send offers or ads to your Augmented Reality glasses as you walk past their store. If you think Google Ads are intrusive now, you ain’t seen nothin’ yet!
THE MARKET LEADERS IN CLOUD AND IoT
If you want to share in the growth of the Cloud through stock plays, your choices are fairly limited.
Developing a cloud infrastructure costs hundreds of millions of dollars, and investments by the bigger players come to billions of dollars.
Bigger networks mean bigger revenues, so small companies just can’t compete in this arena.
The lion’s share of revenue for cloud services goes to just four companies: Amazon, Microsoft, IBM and Google. All of those companies are now investing heavily in new cloud server farms in locations around the world.
But there are other players who are growing market share. They include large companies like General Electric and Cisco Systems, along with PTC, a company you likely have never heard of but should really pay attention to.
And finally, there are the younger upstarts who are challenging the giants: LogMeIn, Ayla Networks, Exosite, and Zebra Technologies.
BEST CLOUD COMPANIES, RANKED
There are 11 cloud service providers that were ranked by the research firm Forrester in terms of their market dominance, and their potential to expand. Some of these are companies that the average person has never heard of, but will see exponential growth over the next five years.
Some of these companies, like IBM, are not necessarily the hottest stock picks. They’ve already seen a lot of their upside, or may have company divisions that are not as profitable. IBM is considered a good stock to hold onto, but it’s not a hot buy right now.
General Electric is similar. With so many divisions lumped into a single company, the impact of its cloud services is not the only driver of its success.
Other companies focused more tightly on the Cloud, like PTC, might be a better short-term buy.
If you’re interested in driving investment income based on this tech trend, here are the companies to beat:
Amazon (AMZN): The early adopter in Cloud computing, and still the leader. Amazon Web Services holds the distinction of being the fastest growing IT service in history, and Amazon is also investing in all the right spaces to leverage its growth, including IoT through Alexa, and in Virtual Reality. Analyst rating, Strong Buy.
Alphabet (GOOGL): Google Cloud trails Amazon, IBM, and Microsoft’s Azure for market share … but this is the same company that took over most of the smartphone market with Android. Alphabet has spent $30 billion on cloud infrastructure, and stated publicly this year it is going after Amazon for top spot. It also now boasts better reliability figures than AWS. It’s a Strong Buy for long term investments.
IBM (IBM): The IT giant is a market leader in cloud services, and is doubling down on Internet of Things spending with a $3 billion investment to create a separate IoT business unit. More than 1,000 researchers developers and designers have been hired to develop the Watson IoT platform. But, and it’s a big but, overall revenues at IBM have not seen much growth compared to tech rivals. Expect moderate growth initially, followed by rapid growth after 2019 if IBM’s quantum computing program meets expectations. Recommendation: Hold, or Moderate Buy.
Microsoft Azure (MSFT): The Azure suite aims at the growing market for the Internet of Things, providing tools to support IoT functions. The company is rapidly expanding its capacity, and is considered one of the strongest contenders for rapid growth in the sector. Stock prices have done well this year, and will likely continue to show strong growth through 2020. Recommendation: A strong long-term Buy based on innovation in Microsoft’s innovations in cloud services, AR and VR.
PTC (PTC): Much smaller than the preceding four companies, PTC became a major player after acquiring the ThingWorx platform in 2013, and investing a further $1 billion in new infrastructure for IoT. It is considered by IT experts to have among the strongest cloud platforms in the business for connected devices. Strong buy recommendation for a company that’s smaller, more focused on the Cloud, and doing everything right so far.
Cisco Jasper (CSCO): Cisco Systems really needed a boost to remain relevant over the long term, and they got it last year with the acquisition of Jasper, which specializes in managing mobile connectivity. Cisco Jasper is ideal for companies that need to manage IoT devices over cellular rather than WiFi. Cisco’s stock climbed by 17 per cent since the acquisition, but it’s still just a Moderate Buy for us.
LogMeIn (LOGM): This company produces all kinds of cool, cloud-based apps, including the join.me app I use for conference calls. However, it’s real income comes from the Xively platform, which is integrated into Salesforce. Xively is an industry backbone that, for example, allows malfunctioning products to ‘call home’ to Salesforce and automatically dispatch a field service tech. Their platform still needs work, however, so they are a Moderate Buy recommendation this year.
Exosite, Ayla and Zebra Technologies: These three smaller companies all produce cloud platforms for industries that help them track the location and state of their various devices and machines. Exosite and Ayla are privately held, while Zebra (ZBRA) is a publicly traded company that grew rapidly until mid-2015, and has plateaued since then. If Exosite and Ayla were to go public, they could be very exciting stocks for early buyers.
General Electric (GE): GE is focused on industrial-strength cloud services rather than consumer offerings, and is a strong contender in the arena. However, GE also has many other divisions of which some are growing and others shrinking. Overall, it’s a stock to hold but not to buy.
Apple (AAPL): The wild card on the list, Apple holds some important patents and offers a variety of consumer facing cloud services like iCloud, iTunes, Apple Music, new car connectivity apps, and of course Siri. Apple has yet to make a serious dent in the Internet of Things, but as it has shown in the past, Apple has the ability to enter a market late, and do it better than everyone else. Expect a major announcement out of Apple on cloud-based IoT services by the end of the year, and another on cloud-based Augmented Reality systems.
CLOUD TECH A GENERALLY SAFE BET
Tech plays are always a bit risky because technology changes so quickly that products can rapidly become obsolete.
But the stocks in this list are, in general, a much safer gamble.
While technologies will change rapidly, the cloud infrastructure these companies are building today will literally serve as the backbone for most of the major tech innovations for the next decade, if not longer.
Whether it’s Augmented Reality glasses, Virtual Reality goggles, or in-home connected devices, the Cloud servers owned by these companies will fuel all of that growth.
Simply put, broad bets across the companies in this sector are about the safest stock buys you can make in tech, and still see a strong upside.
By Gary Symons, Equedia