• The global cloud computing market is expected to grow at a compound annual growth rate (CAGR) of 16.9% and exceed USD 1.3 trillion by 2025, according to estimates by International Data Corporation (IDC).
• Looking at the fiscal year 3Q21 earnings, we observe a clear trend of the cloud segment being a green shoot, outperforming the other digital economy segments in terms of growth. We expect the trend to continue.
• Cloud computing is a foundational infrastructure for other end application technologies, which we expect to grow and thus act as a driver for the cloud computing industry in the years ahead.
• We expect a 30% upside potential at a target price of USD 115, based on a fair PE of 33X applied to the estimated 2023 earnings per share as of 28 January 2022.
From our previous update in July 2019, the First Trust Cloud Computing ETF (NASDAQ: SKYY) has had a spectacular run-up in prices (Figure 1), as the cloud market has grown tremendously with the top three cloud providers doubling in revenue in the last two years.
Going forward, we see that the cloud computing market is set for further growth as the industry is becoming ever more so important as the world goes digital and many technologies rely on cloud computing. The recent dip in prices is an attractive entry opportunity for investors.
The global cloud computing market, including cloud services, hardware and software components, is expected to grow at a compound annual growth rate (CAGR) of 16.9% and exceed USD 1.3 trillion by 2025, according to estimates by International Data Corporation (IDC).
Moreover, data from an IT survey by Goldman Sachs suggests that there is still plenty of room for cloud adoption rates to grow, as findings show that as of 1H21 only 21% of workloads are on the public cloud, which is expected to double in the next three years.
Figure 1: First Trust Cloud Computing ETF has had a spectacular run up in price, buy the dip.
FY3Q21 earnings signal a growing cloud computing market
The Big Tech sector has not had it easy with supply chain disruptions and labour shortages impacting the e-commerce segment negatively, and the new Apple privacy policies affecting the digital advertising landscape. However, we see a green shoot in the cloud segment which has delivered healthy growth (Figure 2).
Figure 2: Top 4 IaaS Cloud players display strong growth momentum
The cloud segment has done well in the third quarter with cloud market leaders, such as Amazon (NASDAQ: AMZN), Microsoft (NASDAQ: MSFT) and Google (NASDAQ: GOOGL), sustaining strong cloud revenue growth momentum. And we see a glimpse of this sustained growth through Microsoft’s FY4Q21 results, where the cloud segment was the fastest growing at 26% year-over-year (yoy).
Looking at the FY3Q21 earnings, we observe a clear trend of the cloud segment being a green shoot among all the digital economy segments. For example, as Amazon’s e-commerce business slowed down in growth, the company’s cloud business continued to accelerate in growth. Similarly, digital advertising has slowed, while the cloud businesses of the three major cloud players in the US continued to grow (Figure 3).
Figure 3: Cloud segment is a green shoot among the digital economy segments
We expect the trend in the growth of cloud computing to continue as the world goes digital and more technologies are built based on the cloud computing infrastructure.
Greater demand for cloud computing as end applications grow
Cloud computing is a foundational infrastructure for other technologies and end applications, such as autonomous vehicles, smart homes, factory automation and many others. As the world becomes increasingly digitalised, we expect these technologies to gain traction and contribute to the growth of the cloud computing industry in the years ahead.
First, let us understand some of these end applications (Table 1).
Table 1: End applications that use cloud computing technologies
|
End application |
Detail |
Growth forecast |
|
Smart factories |
Cloud computing technology is required to run big data analysis, AI and IoT etc. in the monitoring and management of the robots and equipment. Some of the newer factories today are fully run by robots controlled by a human operator from another location. |
According to MarketsandMarkets, the global smart factory market is expected to grow at an 11% CAGR from 2021 till 2026 to USD 135 billion. |
|
Autonomous vehicles |
The vehicles require a constant internet connection and big data to navigate the streets, and these data and infrastructure will be based on cloud computing technology. |
According to IHS Markit, autonomous vehicle sales is expected to surpass 33 million units annually in 2040. |
|
Smart homes |
Smart homes are a series of connected by internet devices, enabling users to control house appliances from their mobile devices and remote locations, and the connections and data are stored on cloud computing technologies. |
According to Verified Market Research, the global smart home market size was valued at USD 98.24 billion in 2020 and is projected to reach USD 495.15 billion by 2028, growing at a CAGR of 23.59% from 2021 to 2028. |
|
Smart agriculture |
Drones and autonomous equipment are used to monitor and collect data on the crop and can be used to replace manual labour. Additionally, smart farming uses big data to improve crop yield and efficiency. Similar to smart factories, the equipment requires cloud computing technology to be monitored and managed. |
According to MarketsandMarkets, the smart agriculture market is expected to grow from USD 12.9 billion in 2021 to USD 20.8 billion by 2026; at a CAGR of 10.1%. |
Not only is the list of end application technologies long, many of them are also experiencing rising adoption rates. Among the various end applications, autonomous vehicles, which are robots, are one of the examples.
Pre-covid the hot topic was on robots being a threat to jobs, but now tables have turned. Instead, robots have become key societal assets enabling continued business operation amidst Covid-19. Such as the provision of true contactless delivery and drone delivery to inaccessible mountainous areas.
Moreover, autonomous driving is picking up as observed in Baidu’s (HKEX: 9888) launch of its driverless taxis in the last quarter of 2021 and the growth of autonomous delivery vehicles by the likes of Amazon (NASDAQ: AMZN) and JD.com (HKEX: 9618).
Baidu aims to expand its driverless taxi service to 65 cities by 2025 and then 100 cities by 2030, up from 5 cities as of late 2021. On the autonomous delivery front, according to IHS Markit, autonomous vehicle sales is expected to surpass 33 million units annually in 2040, a significant increase from the 51,000 units forecast for the first year of significant volume in 2021.
Thus, we believe that as the adoption of these end applications grows, more computing power and storage will be needed, and hence the cloud computing industry stands to benefit.
Close to 30% upside potential
To sum up, we believe that the cloud computing industry is set for growth as we head into the next wave of digitalisation and as end application technologies develop. Investors who are keen to gain exposure to the growth of this industry can do so through the First Trust Cloud Computing ETF (NASDAQ: SKYY), our recommended ETF for the cloud computing industry.
The SKYY ETF gives investors exposure to the leading IaaS players (Figure 4), which we believe will continue to maintain their strong growth momentum. We also like the ETF for its exposure to the platform-as-a-service (PaaS) and software-as-a-service (SaaS) companies, as we take the stance that the entire cloud computing industry will grow.
Figure 4: Market share of cloud players
Assigning a fair PE of 33X to the estimated 2023 earnings per share, our target price for the First Trust Cloud Computing ETF (NASDAQ: SKYY) is USD 115. This translates to an upside potential of 30% based on its closing price of USD 89 on 28 January 2022.
Table 2: First Trust Cloud Computing ETF to deliver earnings growth
|
2020 |
2021E |
2022E |
2023E |
|
|
EPS |
16.4 |
22.9 |
29.8 |
38.7 |
|
EPS yoy |
101% |
40% |
30% |
30% |
|
PE Ratio |
- |
43.1 |
33.2 |
25.5 |
|
Upside Potential |
- |
- |
- |
29.4% |
|
Source: Bloomberg Finance L.P., iFAST Estimates *Based on PE multiple of 33X Data as of 28 January 2022 |
||||
Given the volatile markets in the rising interest rate and inflationary environment, investors can consider beginning with a regular savings plan, before switching to a lump sum investment when the valuations come down even further. This will ensure that they buy more units when prices are low and less when prices are high, bringing the weighted average cost down.
Related article: Digital economy: Will rising rates be a whammy for tech stocks?
Declaration:
For specific disclosure, at the time of publication of this report, IFPL
(via its connected and associated entities) holds a NIL position in the
abovementioned securities. The analyst who produced this report holds a
position in Alibaba and JD.
All materials and contents found in this site are strictly for general circulation and informational purposes only and should not be considered as an offer, or solicitation, to deal in any of the funds or products found/identified in this site. While iFAST Financial Pte Ltd ("IFPL") has tried to provide accurate and timely information, there may be inadvertent delays, omissions, technical or factual inaccuracies and typographical errors. Any opinion or estimate contained in this report is made on a general basis and neither IFPL nor any of its servants or agents have given any consideration to nor have they or any of them made any investigation of the investment objective, financial situation or particular need of any user or reader, any specific person or group of persons. You should consider carefully if the products you are going to purchase are suitable for your investment objective, investment experience, risk tolerance and other personal circumstances. If you are uncertain about the suitability of the investment product, please seek advice from a financial adviser, before making a decision to purchase the investment product. Past performance is not indicative of future performance. The value of the investment products and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. In respect of any matters arising from, or in connection with the said research analyses or research reports, recipients of the report are to contact IFPL at 10 Collyer Quay, #26-01 Ocean Financial Centre Building, Singapore 049315, or by telephone at +65 6557 2853. Where the report contains research analyses or research reports from a foreign research house and if the recipient of such research analyses or research reports is not an accredited investor, expert investor, institutional investor or an ex-accredited investor, IFPL accepts legal responsibility for the contents of such analyses or reports to such persons only to the extent as required by law. Please note that only certain security(ies) herein are available to all investors, while the rest are only available for certain persons to invest in, such as Accredited Investors (as defined in the Securities and Futures Act) or one who invests at least S$200,000 (or its equivalent currency) per transaction. To qualify as an Accredited Investor, one needs to submit a declaration form and certain relevant supporting documents, according to iFAST’s prevailing policies and procedures.
Please read our full disclaimers on the website at ( https://secure.fundsupermart.com/fsmone/policies/328125/investment-account-terms-&-conditions).
iFAST Financial Pte Ltd (IFPL) (registered address: 10 Collyer Quay #26-01 Ocean Financial Centre Singapore 049315, Telephone: 6557 2000) holds the Financial Advisers Licence issued by the Monetary Authority of Singapore ('MAS') to conduct regulated activities of advising on securities, marketing of collective investment schemes and arranging of any contract of insurance in respect of life policies, other than a contract of reinsurance and the Capital Markets Services Licence issued by the MAS to conduct regulated activities of dealing in securities and providing custodial services for securities. While IFPL has made every effort to ensure the independence of the report's contents, IFPL's nature of business is such that IFPL and its connected and associated entities together with their respective directors, officers and staff may be involved in providing dealing or investment-related services in the abovementioned securities, and have taken or may take positions in the securities mentioned in this report, and may also act as the principal for any buy or sell trades.