Investing in cloud computing: stocks and fund ideas for exposure to a rapid growth sector

Microsoft is again the most valuable company in the world with a market capitalisation of $2.49 trillion having late last week leapfrogged Apple at $2.48 trillion. The fourth and fifth largest companies in the world, Saudi Arabia’s majority state-owned oil company Saudi Aramco comes in a third, are Alphabet and Amazon.

Microsoft, Alphabet and Amazon, three of the world’s five biggest corporations, all have one common thread running through their continued growth stories – cloud computing. The rapid growth rates of revenues at the three tech giants’ cloud computing divisions, Microsoft Azure, Google Cloud and AWS, are if not solely responsible for maintaining overall growth, crucial factors.

All three are much better known for other businesses. The Office productivity software suite and PC operating system Windows in the case of Microsoft. The Google search engine and suite of apps from Gmail to Google Maps are Alphabet’s calling cards. And Amazon dominates ecommerce.

AWS’s success has been such that some Amazon investors, a position more commonly associated with big tech’s critics, would like to see the company split up. The feeling is AWS’s growth is now propping up the valuation of Amazon’s better known but low margin ecommerce business. And that as a stand-alone company, the cloud computing market leader AWS’s valuation would be much higher than it is now, as part of the Amazon group.

Cloud computing is a very different face to the technology sector than the trendy, and sleekly designed consumer products whose brands we personally encounter and spend time with on a daily basis. A little more effort is made with their branding (it is still the tech sector) but cloud computing services providers are, ultimately, infrastructure and utilities companies. They provide the plumbing the connected world runs on.

But it just so happens the connected world is very quickly getting much bigger. And most of runs on cloud computing services, which are the digital economy’s equivalent to utilities and logistics. Cloud computing platforms host websites and applications like the urban environments that host office buildings and retail spaces. And it’s cloud services that allow for the extremely low latency of web applications. They are available and respond immediately to users all over the world with almost no difference if they are in London or Bogotá.

Public cloud services end-user spending worldwide from 2017 to 2022 (in billion U.S. dollars)

Source: Statista

The public cloud computing market is expected to be worth $482 billion dollars by 2022 and a recent report tips that to rise to almost $800 million by 2028. That could be conservative.

Cloud computing is one of the meta trends investors should be keeping a close eye on over the next few years. We’ve already mentioned Amazon, Microsoft and Alphabet as stocks with significant exposure to the cloud computing market, even if they are far from pure plays on the sector. All three are early market leaders and have significant first-mover advantages when it comes to the public cloud market.

But cloud computing is a quickly growing market and will be for years to come. There are plenty of other companies that offer investors exposure to the sector. Let’s take a look at some.

OMHcloud

OMHcloud was founded by Polish entrepreneur Octave Klaba in 1999 so is about as mature a company as it gets in the cloud computing sector. However, the company, based in the industrial town of Roubaix in northern France, was just listed on the Paris Stock Exchange in mid-October. It was valued at around €3.5 billion with shares sold at the lower end of the proposed range at €18.5.

They’ve since risen to €20.16, representing a good early return for IPO investors despite an 8.5% slide last week. Klaba commented ahead of the IPO:

“I know it’s hard to believe that a company from Roubaix that was bootstrapped with no venture funding can compete with American tech giants. The IPO will help us convince the doubters that this is really happening and that they should get on board.”

OVHcloud started out as a website hosting company and now provides cloud computing, storage and networking services to clients from mainly Europe and the USA. It wasn’t until 2016 that OVHcloud took on any outside investment when it sold 20% to private equity funds KKR and Tower Brooks for €250 million, which explains the company’s relatively long incubation period before going public despite being well-established in such a quickly growing sector.

“What I am trying to prove with OVH is that there is another model that is more European that puts entrepreneurs and families at the centre of the ecosystem. In ours, the entrepreneurs keep control instead of being at the mercy of investors or financial pressures.”

Unlike AWS who are public cloud computing platform, OVHcloud is focused on private cloud services where equipment like servers is not shared but exclusive to a single organisation. It estimates the private cloud market size as worth €8 billion to €13 billion annually and growing at 15% to 20% a year. The company currently holds an estimated 10% to 15% of the private cloud market in Europe and counts IBM Cloud as its main competitor.

“OVHcloud is the only European company that has a chance of resisting the dominance of the US tech giants. It is a very important actor in European tech, and it’s telling that Octave has built it on his own without any help.”

If OVHcloud is even moderately successful in accelerating its growth as a newly public company it should have plenty of upside at its current valuation and is a stock worth looking into for investors interested in cloud computing exposure.

DigitalOcean

DigitalOcean is a U.S.-based competitor to AWS, Microsoft Azure and Google Cloud in the public cloud computing space. It listed in March of this year and has already seen its valuation climb by almost 135% to over $10 billion.

While the big three’s focus is on larger companies, DigitalOcean’s target niche is the small businesses that make up around half of the global economy. Small companies are also as a whole at a less advanced stage in their digital transformations, which means there is huge scope for growth in the sector. The company thinks it can grow its revenues at a rate of around 25% a year in the mid-term.

Already profitable, DigitalOcean is certainly a prospect as a stock for cloud computing exposure.

Cloud computing ETFs

Another option for investment exposure to the cloud computing sector, and one that offers greater diversification and less work than picking individual stocks, is actively managed sector ETFs.

The Motley Fool highlights two that could be worth consideration. The first is the Nasdaq-listed First Trust Cloud Computing ETF. It has around $7 billion of assets under management and invests in a basket of 65 cloud infrastructure and software stocks. That means it not only invests in companies like AWS, OVHCloud and DigitalOcean but also companies like Salesforce that offer cloud-based digital solutions referred to as SaaS products (Software as a Service), which is another quickly growing cloud sector.

Its fees are 0.6%.

Another more focused alternative, it only invests in 36 cloud stocks compared to First Trust’s 65, is the Global X Cloud Computing ETF, which launched in 2019. It mainly invests in SaaS companies so has a different focus to the other cloud sector investment options covered.

It is also smaller with around $2 billion of assets under management and charges a slightly higher annual fee of 0.68%.