Technology shares have witnessed a phenomenal year, with Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Google [Alphabet] (GOOG) — or FAANG stocks — being an investor’s delight, as the coronavirus boosted remote working and rapid digital adoption while forcing people to stay indoors and scout for entertainment content online.
Not just for this year, FAANG stocks have been major wealth creators for investors. In about ten years, they have collectively returned more than 2,300 percent. In the past five years, FAANG has returned about 305 percent, while their four-year gains stand at 330 percent.
While the stellar performance can tempt investors to add them to their portfolio, some market participants question if the pack’s returns potential has likely peaked. Is it time to look at some other segments within the technology space that could be the trendsetters and create the next set of exponential growth in investor wealth?
No Dark Clouds Here
Right from the outbreak of the pandemic till now, technological products and solutions have been the pillars that supported the global economy from witnessing a complete collapse. Tech deployment and upgradation in several sectors of healthcare, education, business, and governance ensured effective business and social continuity. One of the major trends to have emerged among these tech solutions has been the rapid adoption of the Cloud and other related services by businesses.
Shares of such cloud companies have also risen sharply this year, and with a rapid acceleration in companies and governments opting for the Cloud, it could be the major disruptor going forward.
Bessemer Venture Partners, in this report, argues that cloud computing is the megatrend of the next decade. They have also coined another acronym, taking cues from FAANG, to present the basket of public cloud computing companies MT SAAS. These include Microsoft (MSFT), Twilio (TWLO), Salesforce (CRM), Adobe (ADBE), Amazon (AMZN), and Shopify (SHOP). Microsoft and Amazon, though a part of big tech names, also run their cloud segments with Azure and Amazon Web Services.
The report states that these MT SAAS stocks have vastly outperformed FAANG from a four- or five-year perspective. Their four-year gain of 803% and 886% for the past five years is a testament to how early investors in these companies are sitting on handsome returns with more profits in the offing.
The performance of the First Trust Cloud Computing ETF (SKYY) has caught the eyes of investors as well. The fund has surged 190% since its inception in 2011 and about 40% in the past twelve months.
What Has Clicked For These Companies?
In simple terms, with cloud computing, companies deliver services of storage, databases, servers, networking, software, analytics, and intelligence — all over the internet. These help companies in effective collaboration, better agility, secured and better efficiency along with offering cheaper data storage and the chance to scale up quickly to cash in on business opportunities.
Within the cloud computing sector, the hot favourites among investors have been those providing software-as-a-service (Saas) and infrastructure-as-a-service (IaaS). As more companies shift completely to the cloud, analysts believe SaaS stocks are well placed to gain from the trend.
SaaS companies currently make up 25% of the enterprise software market, and ARK Invest projects that SaaS revenues will grow at a 21% CAGR for the next decade and surpassing 80% of the enterprise software market by 2030. Another reason that SaaS is popular is its revenue model. Customers of such companies buy renewable subscriptions rather than one-time software licenses, thus forming a source of recurring revenue for the companies.
Apart from the companies mentioned as part of MT SAAS, there are several big and small cloud firms cashing in on this rapidly emerging trend. Oracle (ORCL), Akamai (AKAM), Cisco Systems (CSCO), F5 Networks (FFIV), Juniper Networks (JNPR), and VMware (VMW) are few major names among several players in this space.
While the pandemic boosted its consumption and adoption, cloud computing has been eating into the market share of traditional computing service providers in the past few years. Forrester Research pegs the global public cloud market to hit $178 billion this year, up from about $146 billion in 2017.
With such promising projections and growth potentials, cloud computing and Saas companies are likely to steal the show for investors in tech shares for the next decade or so. Cloud computing is projected to hold the majority of share in the enterprise software segment by 2025 and a vast majority of all software by 2030, making this sector a growing force to be reckoned with.