Clouds

Over the past two weeks, most of our businesses presented their 2020 Q3 results. The numbers show the tectonic shift of wealth within society.

Just five years ago, a trillion dollar market valuation still sounded unimaginably big. Few people would have thought that the trillion dollar+ businesses would continue to grow at such a stunning rate.

Satya Nadella, CEO of Microsoft, said in the presentation of the third quarter earnings: “The next decade of economic performance for every business will be defined by the speed of their digital transformation. Tech spend is 5% of GDP. We think it will double in the next 10 years and if anything, this pandemic has perhaps accelerated that doubling. In that context, the large most secular need is the need for distributed cloud infrastructure. It’s both needed for modernizing existing applications you have, and that’s, by the way, 20% penetrated so there’s another 80% that needs to move.”

Enterprises are moving workloads to the cloud at an accelerated pace. It enables cost efficiencies and enhances security. The whole non-Chinese world is basically moving to three cloud infrastructure platforms. Amazon Web Services is growing 29% and is now at a USD 46 billion annual revenue run rate. Amazon’s cloud business alone is worth more than USD 600 billion. Microsoft’s cloud division hit a USD 25 billion revenue run rate and is growing at 47%. Google’s cloud is around USD 14 billion and is growing at 45%. Google’s cloud growth even accelerated as growth in 2020 Q2 was 43%.

These powerful cloud operations are one reason why the valuations of these three holding companies remain fairly attractive.

Besides the three cloud giants, smaller companies are emerging with niche services. Increasingly, compute power and security are moving to the ‘edge’ – computing that is closest to the client. This enables applications to upload with minimal latency as the fundamental limit of speed remains the speed of light. Here, Cloudflare and Fastly are well-positioned. Fastly did not meet its own third quarter forecast due to regulatory uncertainty about TikTok which accounted for 10.8% of its revenue. Such short-term glitches provide long-term owners with the opportunity to buy at a reasonable price.

We are excited about current investment opportunities.