by James Rattue
With almost 60% of Australia currently in lockdown, and working and learning remotely, the value and importance of the internet has never been more obvious. Companies providing cloud computing software have been critical in allowing us to continue life with some level of normality.
Cloud computing is the delivery of on-demand computing services, from applications to storage and processing power, typically over the internet and on a pay-as-you-go basis.
During lockdown I, like many others, have increased my use of cloud-based services both for work and for personal use. I thought it would be instructive to take a look at how my usage of cloud computing companies has increased, given that my experience is likely to be typical of many others, and consider whether these patterns are likely to persist in a post-lockdown world.
You can invest in a diversified portfolio of cloud computing related companies using the BetaShares Cloud Computing ETF (ASX: CLDD). More on this later…
Unable to speak face-to-face with colleagues, clients, family, and friends during lockdowns, I have significantly increased my usage of video communication services such as Zoom (3.4% weighting in CLDD1) and Microsoft Teams (one business line of Microsoft, a 2% weighting in CLDD).
These cloud services have seen an enormous increase in their userbase through lockdowns. Zoom for example saw a 470% increase in business customers through 2020 (see figure 1).
During lockdowns, businesses and individuals have become more comfortable using teleconferencing services, and are unlikely to cease using them altogether when things return to normal, especially as many businesses are transitioning to a hybrid work from home model. To illustrate, from 19 November to 23 December 2020, when restrictions had been eased in most states, two-thirds of Australians were still working from home, compared with 42% pre-covid2, and it was reported that 47% of employers were open to retaining working from home as part of their workplace mix3. Businesses such as Zoom have expanded their service offering from just meetings to areas such as webinars and voice calling, integrating their services further with their end-users.
Figure 1 – Zoom customers, January 2018 – January 2021
Video streaming platforms
I’m certainly guilty of increasing my screen time during lockdowns, with an increasing part of my entertainment coming from cloud-based video streaming services such as Netflix (3.9% weighting in CLDD) and Amazon Prime (one business line of Amazon.com which has a 1.8% weighting in CLDD).
Video streaming services, which fall under the Cloud computing subcategory of ‘Software as a Service’ (SaaS), have seen a large uptick in subscriptions during worldwide lockdowns, as movie and entertainment seekers switched their spending from going to the cinema to watching from home.
While this uptick may not be so strong in a post-lockdown environment, there has been a long-term trend of increased subscribers to home streaming services (Figure 2). This has been matched on the other side by a decreasing trend in movie ticket sales (Figure 3), as home cinema setups increase in quality and the price of taking the family to the cinema far exceeds a monthly subscription to a video streaming platform.
Figure 2: Netflix subscribers, 2001 – 2020>5
Figure 3: Movie tickets sold, US and Canada, 1980-20206
Source: Statista 2021
Prior to lockdowns I would have considered myself somewhat old-fashioned, in that I did about half my non-essential shopping at a physical shop and the other half online. Now that many storefront shops are closed, I’ve had no choice but to transition completely to online shopping.
Online retailers use a number of cloud-based technologies to assist their businesses. Shopify (4.7% of CLDD), for example, is an e-commerce platform that helps businesses with marketing and sales of their products online as well as with analytics, management of orders, shipping and payments. Shopify has more than 86,000 live online stores in Australia with some of its largest clients including JB Hi-Fi and Harris Farm Markets7.
My own transition to online shopping has been seamless and user-friendly, and I’m sure my shopping habits will be more in favour of online shopping in the post-lockdown world. If my own experience is a representative one, it’s reasonable to think that a greater proportion of shopping will take place online even after lockdowns ease.
The investment case for cloud-based services
While lockdowns may have shone a spotlight on the importance of cloud-based services, the long-term, post-lockdown outlook for cloud computing also appears bright.
- Structural tailwinds: Demand for cloud computing services surged in the pandemic and seems unlikely to abate, as work, school, and social activities move increasingly to digital experiences. Worldwide public cloud end-user spending is forecast to grow 18.4% in 2021, and at a compound annual growth rate (CAGR) of 19.1% from 2021 to 20288 (see figure below).
- Attractive business model: Cloud computing presents an attractive business model as corporate clients generally pay a recurring, sticky and predictable subscription fee. Businesses using cloud software typically pay lower upfront costs compared with on premises infrastructure, as well as decreased ongoing costs for IT personnel, hardware upgrades, maintenance and system outages/downtime. For the businesses providing cloud software, increased users of the cloud create increased scale. In turn, increased scale implies greater cost efficiencies and creates barriers to entry for other companies.
- Attractive forward earnings compared with major indices – As the table below shows, 12-month forward revenue (as represented by the index CLDD aims to track) is projected to outstrip more diversified indices, and could represent an exciting opportunity to participate in a longer-term growth story. 12-month forward earnings per share growth also looks attractive compared to broad-based technology, as well as to the broad global market, supporting the case for potential investment.
Source: Bloomberg. As at 31 August 2021. Actual outcomes may differ materially from forecasts.
How to invest in cloud computing
Investors seeking exposure to cloud computing can consider the BetaShares Cloud Computing ETF (ASX: CLDD).
The Index that CLDD aims to track currently comprises 36 leading companies providing exposure to the global cloud computing industry.
From inception in 2013 to 31 August 2021, CLDD’s index returned 33.4% p.a. compared with 14.1% p.a. for the MSCI World Index. CLDD’s index has also outperformed the NASDAQ-100 Index, which delivered returns of 25.7% p.a. over this period9.
There are risks associated with an investment in the Fund, including market risk, technology sector risk, international investment risk and concentration risk. The Fund’s returns can be expected to be more volatile (i.e. vary up and down) than a broad global shares exposure, given its concentrated sector exposure. For more information on risks and other features of the Fund, please see the Product Disclosure Statement, available at www.betashares.com.au.
1. As at 6 September 2021.
4. Dean, Brian. “Zoom User Stats: How Many People Use Zoom in 2021?” Backlinko, 10 Mar. 2021, backlinko.com/zoom-users.
5. Dean, Brian. “Netflix Subscriber and Growth Statistics: How Many People Watch Netflix in 2021?” Backlinko, 25 Feb. 2021, backlinko.com/netflix-users.
6. Navarro, José Gabriel. “Tickets Sold at the North American Box Office from 1980 to 2020.” Statista, 12 Aug. 2021, www.statista.com/statistics/187073/tickets-sold-at-the-north-american-box-office-since-1980.
7. “Top 100 Australia Shopify Stores 2021.” Automizely, www.automizely.com/store-list/top-100-AUS-shopify-stores. Accessed 26 Aug. 2021.
8. “Cloud Computing Market Size, Share & Trends Report Cloud Computing Market Size, Share & Trends Analysis Report By Service (SaaS, IaaS), By Enterprise Size (Large Enterprises, SMEs), By End Use (BFSI, Manufacturing), By Deployment, And Segment Forecasts, 2021 – 2028.” Grand View Research, Grand View Research, 1 July 2021, www.grandviewresearch.com/industry-analysis/cloud-computing-industry
9. Past performance is not indicative of future performance of index or ETF. You cannot invest directly in an index. Chart does take into account CLDD’s fees and costs.