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Market Comment August 2020 - Cloud Computing No one goes back to using paper and manual processes

The booming share prices of most tech companies are an indication that these companies have been flooded with new business during the coronavirus pandemic. This year’s surge in videoconferencing, online shopping, streaming and video gaming has put businesses such as Netflix and Zoom in the headlines. Some of the companies that provide the foundation for these services could turn out to be equally big winners from the lockdown.

Cloud computing - where data is stored and applications processed in large centralized data centers, with users accessing the technology over the internet - has been on the rise for twenty years. Investors are now betting that the pandemic will bring a sea-change in the uptake of the technology: online habits developed in the lockdown will endure, and new cloud-based business processes will become entrenched. Cloud technology already accounted for 15 per cent of the USD 1.56 trillion spent on IT last year up from 7 per cent in 2015. The increased reliance on the cloud in a time of crisis will only cause this shift in IT spending to accelerate and even double in the next few years. Microsoft’s CEO said that this year’s crisis had already brought “two years’ worth of digital transformation in two months”. Both Microsoft and Amazon, which run the two biggest cloud platforms, have seen their market capitalization propelled above USD 1.5 trillion (each!) on hopes that this points to a lasting shift. Alibaba is doubling down on cloud computing with a USD 28bn three-year investment plan. The Chinese e-commerce group, one of the world’s top cloud providers, said it would spend the money to build next-generation data centres and develop related technologies including semiconductors and servers. Cloud computing is one of Alibaba’s fastest-growing businesses, with revenue in the fourth quarter increased 62 per cent year on year, contributing 7 per cent of total revenue.

Cloud services have generally been able to handle this year’s surge in digital demand, although Microsoft’s Azure platform was forced to cut back some services at the beginning of the crisis to handle the additional workload. Switching a large part of the world’s white-collar workforce to working from home almost overnight would have been inconceivable 10 years ago. The experience of companies like Zoom points to the greater prominence that cloud infrastructure has assumed on the IT landscape during the crisis. In the space of three months earlier this year, the number of minutes spent in the company’s video meetings jumped by a factor of 20 — the sort of surge in demand that would normally jeopardize service quality or lead to outages. Zoom has been able to draw on Amazon Web Services for the extra computing capacity. It also branched out and added Oracle as a second cloud supplier, giving a valuable endorsement to a traditional software company that has been slower to move to the cloud. Another IT old-timer, IBM, unveiled quarterly figures beat analysts’ estimates on second-quarter revenue. Cloud sales are helping to offset coronavirus-fueled declines in the consulting services business. Zoom also depends on services from other on-demand software companies to run its business — part of an array of cloud-based start-ups that have sprung up to handle many specialized business processes. These include PagerDuty, which sells an incident response service used by corporate IT departments: as the crisis hit, the number of incidents reported by customers such as Zoom through its service jumped more than eight-fold, requiring better tools to cope with the additional workload. As no one is going back to using paper and manual processes, cloud services may be an interesting addition to your portfolio. Let us know if you wish for a call to discuss the opportunity, with pleasure we would love to hear from our readers!

Switzerland, August 3rd, 2020


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