The Cloud Computing Age
The rise of public cloud computing was an inevitable next step following the development of the internet. Cloud computing allows companies to access sophisticated connected servers without the hassle of designing, constructing and maintaining complex data centers. With its ability to enable new business models, unlock exponential growth rates, and increase access, the public cloud transformation has a lot to offer.
Quick review of the “cloud”
The public cloud allows businesses and consumers to access data centers connected to the internet via a scalable pay-as-you-go model. The public cloud can be broken into three primary categories:
- Infrastructure as a Service (IaaS) where you rent the servers themselves. Examples include Rackspace, parts of Amazon’s AWS, Digital Ocean, etc.
- Platform as a Service (PaaS) where you rent the servers but they are managed for you so that you don’t have to deal with firewalls, security, load balancing and scaling. Examples include MSFT Azure, Google Cloud and Heroku.
- Software as a Service (SaaS) where you consume a software product delivered digitally via the public cloud. Examples include Netflix, Gmail, Twilio, TeleDoc, Docusign, Spotify, and many many more.
Amazon was the first to offer the public cloud as a place to put data in 2006. They quickly used their cloud platform to amplify and manage their retail services, which is how most people know Amazon.
Connectivity, intelligence and automation
The public cloud is transformational. One example is that it allows businesses to collect detailed real-time data on how their products are used, leading to intelligent insights on customer value. Those intelligent insights can be rolled into new products. The better the cloud structure, the faster and more powerful that feedback loop becomes.
Industrials like automotive manufacturers, construction vehicles, agriculture, equipment manufacturers, food processors and distributors have experienced stalled growth over the past few years. McKinsey estimates that these industries will add $1 trillion in value to their shareholders in the form of increased revenue and increased margins as they unlock the cloud’s full value.
Cloud infrastructure is great for innovation as it reduces the barrier to entry for creative technology solutions. Companies will use the public cloud to deliver better services at scale by listening to and anticipating customer needs in the short term. In the long term, driverless fleets will be powered by the connectivity and software embedded in the public cloud. Maybe we will have pilotless planes. Companies like Cloudflare are working to fix inherent cloud security issues to make these innovations possible.
Investing in the cloud
In ten short years the cloud has become what the internet was to the 90s – growing faster in so many directions it is difficult to exaggerate the cloud’s importance. Disruption is where the big payoffs occur.
When you look at hardware, semiconductors, CPUs and GPUs are critical components for the cloud. The leading providers are dominant. Nvidia and AMD produce 80% of the GPUs and their biggest customers are Amazon Web Services, Google Cloud, Microsoft Azure.
ASML is the only company that sells the EUV technology necessary to produce next-gen semiconductors at the single-digit nanometer width.
When we look at software, the list of opportunities is much longer. Many SaaS businesses are growing revenue at +30% per year. When we look at SaaS, we look at themes like “e-commerce,” “the battle for our attention,” “digitization of finance,” and “healthcare innovation.” Medical technology and financial technology are burdened by regulation; however, COVID is accelerating their ability to access the cloud while maintaining security and compliance. Medical technology (e.g. LVGO, TDOC, AMWL, etc.) and financial technology (e.g. SQ, PYPL, MKTX, etc.) are huge areas of opportunity.
Here to stay
Cloud computing, in all that it has to offer, is here to stay. It presents huge potential for big businesses, the businesses that support and provide for them, and small businesses.
Many legacy businesses are stuck and they need the cloud to grow. Investors who allocate to companies that provide semiconductors, GPUs, data centers, IaaS, PaaS and SaaS are on the leading edge of the cloud transformation.
Nvidia’s new compression algorithm aims to reduce video conferencing bandwidth needs by 90%. This time last year Tesla was able to increase the performance of its cars via an over-the-air update. Microsoft word introduced AI-assisted editing earlier this year. Updates like these can be rolled out to massive sets of customers instantaneously. That’s the power of the public cloud and at this stage, we’re just getting started.
Weekly Articles by Osbon Capital Management:
"*" indicates required fields