Cloud computing
March 2023
Cloud Computing or also known as "cloud services" is a network service delivery model that is based on the use of remote servers connected to the Internet to store, manage and process data and software. In this model, users can access these resources from anywhere in the world and at any time, as long as they have an internet connection.
Cloud computing is a key tool for the digital transformation of companies, since it allows users to access online applications and services in a flexible and scalable way, without having to worry about hardware infrastructure.
In the past, companies used to set up their computer systems on their own premises, which meant using server rooms to store their information. This approach posed myriad risks, including data loss from theft, building damage, high server maintenance costs, and security issues.
However, in the last 15 years, there has been a significant change in the way companies store their data. Now, instead of using their own server rooms, companies are migrating to external servers, managed by third parties and with more secure remote access.
One of the biggest advantages of cloud services is the ability to access high-quality and better-performing servers at a reduced cost. This means that companies can process large volumes of data faster and more efficiently than ever before. In addition, cloud technology also allows them to quickly scale their operations, increasing or decreasing their capacity as needed, resulting in greater flexibility and cost savings. In terms of security, storing information in the cloud offers greater advantages over the use of your own servers. The data centers in which the data is housed often have advanced security measures, regular backups and strict access controls, which significantly reduces the risk of data loss or theft.
Industry structure
Within the cloud services sector, three cloud service models can be identified: "Software as a Service" (SaaS), "Platform as a Service" (PaaS) and "Infrastructure as a Service" (IaaS).
SaaS: In the SaaS model, users have access to software applications over the Internet, without the need to install or maintain the software on their own devices. The provider develops and manages the software in the cloud and takes care of its maintenance. The customer gets a ready-to-use product. Everything remotely. (to use Gmail or Facebook we must not download anything)
Many of these companies are hosted on Google, Amazon or Microsoft servers
PaaS: In the PaaS model, users can develop, run, and manage their own applications in the cloud, without having to worry about infrastructure. In this model, the cloud service provider provides a platform for developing and running applications, including support tools and services.
IaaS: In the IaaS model, users have access to servers, storage, and virtual networks to host and run their own applications and cloud services without major investment. In this model, the cloud service provider is responsible for providing and maintaining the infrastructure, while users have full control over the configuration and use of resources.
Category according to the service
There are different categories of cloud computing services that companies can use to manage their data storage and processing needs. In general, there are three main types of services: Private Cloud, Public Cloud and Hybrid Cloud.
Public Cloud is designed for global use and is open to the general public. Companies like AWS (Amazon Web Services), Windows Azure, Google Cloud Platform and others offer public cloud services through their platforms.
Private Cloud, on the other hand, is designed for companies that require customized solutions due to the sensitivity of the information they handle. In this type of cloud, the resources are assigned to only one client, which guarantees that the information is kept completely isolated from the rest of the users.
Finally, Hybrid Cloud combines elements of both cloud types. In this type of solution, a company can use both private and public resources to meet its data storage and processing needs. For example, a company might use a private cloud storage service to store critical data and a public cloud processing service to run less critical applications.
Industry growth
The cloud services sector has experienced tremendous growth due to the constant development of companies, and their need to optimize their processes and improve their efficiency in an increasingly competitive environment.
In recent years, the sector has grown at rates of 20% CAGR globally and a growth of 17% CAGR is forecast for the following years until 2030.
According to a study carried out by Precedence Research, the global market size of the sector could reach 1.614 billion by the year 2030.
Growth in the sector will slow down when all companies are in the cloud, it will not be negative because there will always be new companies demanding this type of service, but it will be difficult to maintain these growth rates in the future.
At present it is practically an oligopoly dominated by Amazon, Microsoft and Google, with very high market shares, where Amazon has 33% of the market share, Microsoft 21% and Google 10%. Alibaba dominates in Asia.
Cloud computing in the stock market
Some of the biggest companies in the industry are undoubtedly listed on the S&P 500 and are heavyweights on this index. Below is a list of Cloud Computing companies.
Microsoft (MSFT): Known by all, horizontal software company. 57% of the company's income comes from its Cloud services, a very representative part of its income.
Alphabet (GOOG): Another big one, known for its multiple search services and YouTube, only 9% of its sales come from Google Cloud
Amazon (AMZN): The Ecommerce Giant. Only 13% of its sales come from AWS (Amazon Web Service), but these sales generate almost 75% of its operating profits, this is due to a high operating margin in this division, the most profitable for the company.
Oracle (ORCL): The company specialized in cloud services, particularly SaaS, 82% of the company's sales come from cloud services and licenses.
Salesforce (CRM): The company manages and stores customer management databases, practically 100% of its sales come from its cloud services.
Adobe (ADBE): The company makes video and pdf editing software, with its digital media segment and cloud license. 73% of sales come from the Cloud.
Netflix (NFLX): The streaming entertainment company, practically all of its sales come from the cloud or SaaS service, due to the transition of its movies or series.
IBM: The global computer services company, 28% of its sales come from the cloud
Arista Networks (ANET): Hardware, provides servers and cloud network solutions, virtually all of its revenue comes from its cloud-related services.
Fortinet (FTNT): Software in the cloud, but for cybersecurity. all of its revenue comes from its subscription, software and cloud services.
Cloud Computing Companies by Market Cap and Valuation
The graph shows the market cap of the companies and their respective valuation multiples per PER (March 2023)
Some companies in the sector
Advantages of the sector
It is a recurring sector, companies need software for their normal operation.
Stable and growing sector, companies with crisis or without crisis, sell more or less, will not unsubscribe from the service because it is critical in daily operation.
Change cost, it is very difficult to unsubscribe due to all the complexity involved in moving the content to a new server.
Good profit margins, like any technology company has low costs.
High ROIC, they are usually companies that have high ROIC.
Low CAPEX
Advantage in Intellectual property and scale.
Income recurrence.
Organic growth and M&A (as the sector matures, M&A becomes more interesting)
profit margins
competitive position
Factors to watch
Sector with high valuations, being a sector that has been quite overheated in recent years, some companies have reached valuations of more than 100x profits and many of them, exceeding 50x profits.
Stock options (stock based compensations) high in many companies. They are companies that tend to abuse a lot of this type of incentives with high items in stock options.
Conclusion
Currently, the cloud service has become a fundamental solution for many companies that seek to improve their efficiency and reduce their costs. As technology continues to advance and new cloud applications and services are developed, cloud computing is likely to continue to play an important role in the information technology (IT) industry.
On the other hand, artificial intelligence and machine learning are also having a significant impact on cloud computing. Cloud service providers are increasingly offering AI and machine learning services in the cloud, enabling companies to process large amounts of data and gain valuable insights without having to invest in expensive IT infrastructure.
In short, cloud computing will continue to play an important role in the information technology industry as new cloud technologies and services continue to evolve, enabling companies to gain greater competitive advantage and improve efficiency.