Cloud growth rate is six times higher than world GDP
Microsoft has quickly emerged as a most important cloud computing firm.
In a low-growth environment it is worth considering identifying/investing in megatrends through highly profitable companies important to generate growth in the portfolio. Megatrends tend to be independent of the economic cycle and typically last for over 10 years in duration.
Cloud computing, often referred to as simply “the cloud,” is the delivery of on-demand computing resources—everything from applications to data centres—over the Internet on a pay-for-use basis. Most of this growth will take place in the public cloud market. Public clouds are owned and operated by companies that offer rapid access over a public network to affordable computing resources. With public cloud services, users don’t need to purchase hardware, software, or supporting infrastructure, which is owned and managed by providers. The ultimate benefit for businesses to migrate to the cloud and away from on premise is a high return on investment. It is simply a profitable activity to undertake.
The cloud computing megatrend is a great example where forecasts suggest strong growth for at least the next 10 years. According to the new Worldwide Semi-annual Public Cloud Services Spending Guide from International Data Corporation (IDC), worldwide spending on public cloud services will grow at a 19.4% compound annual growth rate (CAGR) — almost six times the rate of overall global GDP growth – from nearly $70 billion in 2015 to more than $141 billion in 2019. This is also great 6 times faster than global GDP.
Microsoft has quickly emerged as one of the most important cloud computing firms in the world Azure, the firm’s public cloud service, has established itself as the number-two player in the space behind Amazon. Microsoft’s business is organized into three segments: productivity and business processes (including Microsoft Office and Dynamics), intelligent cloud (including Azure, Windows Server OS, and SQL Server), and more personal computing (including Windows Client, Xbox, Surface, phones, and Bing search advertising). These segments represent 28%, 25%, and 46% of sales, respectively.
Microsoft has continued to deliver strong operational performance since Satya Nadella took over as CEO in 2014.
The company is successfully and aggressively managing the transition of its customers to cloud-based services, in which the migration to subscription and cloud will drive re-acceleration in revenue and earnings and cash flow growth. Microsoft was early to the cloud market in our opinion and we believe its enterprise cloud offering, Azure, is one of the most comprehensive infrastructure and platform cloud suites offered by any enterprise software company.
Another area of strength is the cloud consumer software business which is primarily Microsoft’s cloud version of its dominant Office productivity software for the consumer. Microsoft continues to show progress across multiple product fronts as the company manages its way through the cloud transition. The company is well on its way to management’s stated goal of a US$20Bn commercial cloud run rate by FY18, having recently reached a greater than $12Bn run rate at greater than 50% year/year growth.
In addition, the new management team is streamlining the company to be more efficient which will improve margins beyond historical levels. Microsoft has many of the attributes of a quality business including very high levels of profitability, sustainable competitive advantages, strong financials, cash flow generation and solid growth prospects all at an attractive valuation.
There are many acronyms in the cloud industry all of which describe the activities undertaken by businesses to either store, process or engage with their customers in the cloud. These activities include:
• Software as a service (SaaS) – Cloud-based applications—or software as a service—run on distant computers “in the cloud” that are owned and operated by others and that connect to users’ computers via the Internet and, usually, a web browser.
• Platform as a service (PaaS) – Platform as a service provides a cloud-based environment with everything required to support the complete lifecycle of building and delivering web-based (cloud) applications—without the cost and complexity of buying and managing the underlying hardware, software, provisioning, and hosting.
• Infrastructure as a service (IaaS) – Infrastructure as a service provides companies with computing resources including servers, networking, storage, and data centre space on a pay-per-use basis.
Mr Monik Kotecha CIO Insync
Fund Managers (02) 9216 2977 0413 768 480
Distributed by Chris Hocking Strategies 0418 603 694
Originally published 17 October 2016.
To download as a PDF, click link Microsoft – Cloud growth rate is six times higher than world GDP.
Monik Kotecha is the chief investment officer at Insync Fund Managers which invests in highly profitable companies that are benefitting from global megatrends.
He has worked in London, New York and Sydney. He spent over 7 years as a Senior Portfolio Manager at Investors Mutual Limited, 5 years with BT Funds Management Limited and 3 years with the Abu Dhabi Investment Authority.
Monik has considerable hedging and currency risk experience.
Insync manages a concentrated, large cap global equity fund incorporating downside protection strategies and active currency management. The fund is managed conservatively, with an absolute return focus, given that the key to compounding strong long term returns is to minimise drawdowns. The stocks that Insync focuses on are exceptional global businesses with high returns on invested capital, strong free cash flow generation, solid balance sheets and a track record of returning cash to shareholders through growing dividends and/or share buy-backs.