Finding value in the cloud

In 2018, it might not be such a bad idea for investors to have their heads in the clouds.

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Jonathan Mzengeza, global technology analyst at CIBC Asset Management, says cloud computing is one of the top three trends he’s monitoring for the CIBC Global Technology Fund. (The other two, esports and artificial intelligence, will be covered in an upcoming podcast.)

“We think there’s a long runway of growth for these businesses,” Mzengeza said in a July 20 interview. “Current cloud penetration is only 31% of all workloads and we think it will go to 40% by 2020,” exceeding 90% over the longer term.

This means there’s “a big market opportunity for companies like Microsoft and Amazon to tackle that market.” Both companies are top holdings in his fund, 20% to 40% of which is exposed to cloud companies, Mzengeza said. He also holds Google. Cloud computing’s infrastructure side, which provides platforms, storage, networking and other services, has been consolidated into those three major players, he said.

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Microsoft’s stock soared last month after the company reported its quarterly earnings. Its value, which surpassed US$800 billion, has more than doubled since Satya Nadella became CEO in 2014, Reuters reported in July. Nadella has helped Microsoft monetize the growing demand for cloud-based software, Reuters added.

Amazon, meanwhile, saw its shares hit an all-time high in July after reporting a quarterly profit of more than US$2 billion. Revenue for its cloud business, Amazon Web Services, jumped almost 50% year over year to US$6.1 billion in Q2.

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On the application side of cloud computing, Mzengeza said he likes work platform ServiceNow and Ottawa-based supply-chain planning company Kinaxis. The latter could expand into various sectors, including automotive and healthcare, he said.

“We think the growth in those segments is captured in the value of [Kinaxis] right now, and that’s why we see a long runway for growth for that company as it provides that software through the cloud,” Mzengeza said.

While the total cloud market right now is estimated at around $42 billion, he said, “the market opportunity is anywhere between $150 billion to $1 trillion. We see global businesses continuing to allocate more of their total IT spending toward the cloud, so we see a much larger market.”

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This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.