How to Invest in Cloud Computing

Investing in cloud computing

The sky’s the limit for the cloud computing sector, with demand for cloud services skyrocketing—and pulling opportunities for the growth-minded investor into play.

In 2020, COVID-19 stopped businesses and communities in their tracks. Yet lockdowns around the world couldn’t stop workers, teachers and students, and families and communities from collaborating, studying, shopping, conducting business, and reconnecting—thanks to the many novel cloud-based solutions that now seem part of everyday life.

Nowadays, cloud computing is the default solution for many, with consumers giving a thumbs-up to businesses who invest in cloud-based technologies to improve services and products. Long-term predictions anticipate companies spending on cloud computing and infrastructure to reach $118.8 billion in 2025, a full 67 percent of the total - compare that to the amount companies will spend on infrastructure that isn’t related to the cloud, only $58.6 billion (1).

Whether email, software, data storage and backup, audio and video subscriptions, or more—cloud computing has touched upon every part of life, and will continue to transform how we interact into the future.

What is cloud computing?

The “cloud” is a network of remote systems around the world that can be accessed by private networks or the shared internet.

Based “in” the cloud, cloud computing itself is more like an ecosystem of 3 services than a specific product.

• Software-as-a-Service (SaaS) allows people to purchase software via “pay as you go” or on-demand (think Netflix, Shopify, and Slack) .
• Infrastructure-as-a-service (IaaS) allows users to purchase access to IT infrastructure such as servers and operating systems on-demand (like Amazon Web, Microsoft Azure, and IBM).
• Platform-as-a-service (PaaS) is a platform that allows users to create software applications and databases instead of investing in hardware (such as Google App Engine, Salesforce, and SAP in Europe).

From SaaS and IaaS to PaaS, moving to the cloud allows companies to rethink and redefine processes. This migration can boost momentum toward change—and profits. However, there are challenges ahead for businesses, as well as investors looking for profitable companies to invest in.

Why invest in cloud computing?

Investors who look for next-gen solutions are likely to find exciting investments in the cloud computing sector. Take for example, Spotify’s success story. In 2015 at its IPO, Shopify was valued at $1.27 billion. In 2020, it was valued at $127 billion (2). Founded by Tobias Lütke and Scott Lake, Shopify started as an online store in 2004 to sell snowboards when they couldn’t find a platform that worked well for them. Now, its e-commerce platform is used by individual sellers and big companies like Google.

For investors with a lower risk tolerance, large-cap giants like Microsoft and Adobe have already been integrating cloud-based solutions. For those with their eye on the long-term horizon and can handle more risk, startups like Snowflake are disrupting the industry by allowing businesses to have more control over the data and infrastructure they need. Investors can track the performance of these stocks over time as well as mutual funds and ETFs that include a diverse array of cloud-computing-focused holdings (3).

Before investing in a cloud upgrade, companies weigh the pros (access) and cons (cost) of cloud computing. These arguments for and against that are worth noting for an investor interested in the sector.

The pros of cloud computing

• Flexibility and cost. Companies, like consumers, like cloud computing because they can access subscriptions and services when they need it and pay only for what they use. Businesses that are investing in cloud computing can scale up without having to pay a steep price.
• Wide access to data and storage. With cloud computing, even small companies could maintain a more competitive edge. Not only can they access powerful processors without breaking the bank but expensive necessities like backing up data, security, and network management can be outsourced as well.
• New business models. Streaming, remote working, distance learning—with cloud computing entertainment, work, and education have been transformed. What will be the next transformation?

The cons of cloud computing

• Lack of access. Cloud-based applications rely on a fast and reliable internet connection, which is not available in all communities. 5G technologies is one associated opportunity for investors to look into, to support cloud computing.
• Security and privacy fears. With a shift into cyberspace comes cybercrime. A potential loss of privacy and data are issues that hold many businesses and consumers back from adopting cloud-based technologies. Companies committed to investing in their futures via the cloud also invest in robust cyber-security. Businesses who use hybrid clouds—combining public and private clouds—also address privacy concerns by being able to control what data is accessible where.
• High cost of change. Finding workers skilled in migrating to the cloud and the cost of rewriting applications for the cloud are two of the expensive costs associated with the shift to cloud computing. Some companies find they can’t make the investment, while others do—and find that their bottom lines showed the cost was worth it.

As challenges get addressed by the next wave of startups and technologies, cloud computing—SaaS, IaaS, and PaaS—will continue to transform how businesses operate, as well as how shoppers shop, how people listen to their favorite artists, and how people connect with loved ones. There are risks involved that every investor should be aware of but the future will be cloudy—meaning filled with cloud-based technologies.

How to invest in cloud computing

In an industry as large and diverse as cloud computing, picking winners and losers can be challenging. However, there are a number of ETFs and mutual funds that focus on cloud computing companies and even the different types of solutions. A search on Magnifi suggests that there are many of these funds available to choose from:

• Invest in cloud computing
• Invest in SaaS
• Invest in cloud computing and security

References:

1. Ranger, Steve, “What is cloud computing? Everything you need to know about the cloud explained,” February 25, 2022, ZDNet.com, https://www.zdnet.com/article/what-is-cloud-computing-everything-you-need-to-know-about-the-cloud/.
2. Forman, Laura, “Shopify’s Business Sells Itself, for Now,” July 29, 2020, Wall Street Journal, https://www.wsj.com/articles/shopifys-business-sells-itself-for-now-11596041071
3. Mutual Funds and Exchange Traded Funds (ETF’s) are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.