Humanity is experiencing a data explosion.
Though the global population is expected to grow 15% from 2015 to 2025, the amount of data we create annually is forecasted to surge over 15-fold in the same period.
This is due to the world becoming increasingly connected with our rising use of social media, e-commerce and sharing platforms, as well as the fast-growing number of connected devices on our bodies and appliances.
Big data catalysing the age of AI
This phenomenon of data creation is in turn playing a key role in catalysing the emergence of Artificial Intelligence (AI).
While AI has been studied for over 50 years, one critical component which has been missing for AI’s effective development until now is the availability of massive datasets that AI algorithms require as inputs for iteratively learning patterns and associations.
With the rise of Big Data, and also rapid improvements in computing power, data storage and algorithm science, AI is advancing at an unprecedented rate today.
Tectonic shifts in our economies and lives
Ultimately, the advent of general AI – which is powerful human-like machine intelligence that can learn independently, experience the environment and interact with others – will result in tectonic shifts in our economies and our lives, though its full impact and implications over the long term are still uncertain and hotly debated over at this point.
Over the near to mid-term, however, the potential business applications of specialised AI, which is optimised for specific tasks, are vast.
These include enhancing sales and customer engagement, improving operational efficiencies, security and surveillance, autonomous driving, and many more.
The Industrial Revolution 4.0
The accelerating fusion of these technology trends and others – such as AI, Big Data, the Internet-of-Things, cloud computing, robotics, energy storage, and material science – characterise the exciting economic landscape ahead that many call “The Industrial Revolution 4.0”.
Clearly, change is afoot, and amid these myriad trends and forces at play, how should investors position themselves for the future?
Cloud computing plays central role in enabling landscape
In our view, one investment theme plays a central role in enabling the technological landscape ahead: Cloud computing.
Cloud computing is, simply put, the usage of on-demand computing services, which includes storing, retrieving and the processing of data, over the Internet rather than using local servers and processors.
As we head into the future economy, businesses will confront an ever-growing need to work with exponentially increasing quantities of data.
Over the long term, the resources required to set up, maintain and continually expand in-house computing infrastructures will become unviable, versus the alternative of using cloud providers who operate with immense economies of scale and therefore offer on-demand computing services at significantly lower costs.
In two recent surveys, about three quarters of the corporates who had migrated to the public cloud reported more than 20% cost savings after their second year, and 95% of corporates said that the demand for public cloud solutions is accelerating.
Still early innings of the cloud computing theme
The strong tailwind behind the cloud computing theme is evident from the breakneck growth already experienced by early cloud providers.
Amazon is the first-mover and most dominant player in the public cloud space, and its cloud revenues have multiplied a whopping 35 times from $0.5 billion in 2010 to $17.5 billion in 2017.
The second largest provider, Microsoft, recently reported a 93% year-on-year increase in its cloud revenues in the first quarter of 2018.
We are, however, still in the early innings of the cloud computing mega-trend.
Only 19% of all corporate workloads are on the cloud today, but with broadening cloud migration, total corporate cloud workload is expected to grow four times larger within the next 10 years.
Public cloud spending, comprising Infrastructure-as-a-Service and Platform-as-a-Service segments, is expected to grow at an average of 27% per year from 2017 to 2021, which far exceeds the 4% per year forecasted for global IT spending over the same period.
Deep moats around leading public cloud vendors
In addition to its growth potential, another key feature of the public cloud market is the increasing dominance of leading cloud providers, who operate with large economies of scale and enjoy clear technology leadership.
The four largest public cloud vendors – Amazon, Microsoft, Google and Alibaba – command an impressive 65% share of the public cloud market today, and this is expected to expand to 75% by 2020.
They have deep economic moats resulting from high scale efficiencies in physical infrastructure and technology development, which had in turn required sizeable capital expenditures.
Over the last five years, we estimate that these four companies have cumulatively allocated more than $100 billion into their cloud businesses, and they continue to invest profitably at a rapid pace today.
This comprises investments in innumerable data centres, computing equipment, capital leases, and headcount for research and management.
Ride on the Cloud Kings
As the cloud computing theme continues to gain momentum, the sectors and companies that will benefit are diverse, and include those involved in cloud-related hardware and software, IT services and distribution, data centers, semi-conductors, and others.
Overall, we believe that the three largest public cloud vendors – Amazon.com Inc., Microsoft Corp. and Alphabet Inc. – represents compelling investment opportunities within the investment theme with their deep economic moats, clear technology leadership, and strong overall abilities to further consolidate their leading positions.
Two other public cloud companies, Salesforce.com Inc. and Workday Inc. – which provide on-demand use of customer relationship management and enterprise resource planning applications, respectively – are also attractive investment propositions that specialise in key areas of adoption for corporates migrating to the cloud.
A version of this article by the author appeared in The Sunday Times on 20 May, 2018, with the headline ‘Investment opportunities in cloud computing’.
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