Cloud Computing Continues to Drive Growth

Transcription

1 EQUITY PERSPECTIVES Cloud Computing Continues to Drive Growth September 0, Views Despite considerable economic headwinds, massive investments in "the cloud" are helping a number of companies reach new heights. And the trend remains strong. In Brief: The market for cloud services has mushroomed and redefined the IT industry. Leading-edge tech companies born in the cloud have transf ormed their respective markets. Others are providing the platf orm f or innovative start-ups to expand rapidly. Among the many benef its are cost savings f or both providers and customers, resource flexibility, and ease of use and speed of deployment. Even so, there is still a raging debate about the economic advantages of the public cloud versus the private cloud. For Lord Abbett equity portf olios, cloud exposure means companies across the capitalization spectrum. But throughout the range of market caps are companies that build on cloud, deliver their applications from the cloud (software as a service), and provide services to help customers transition to cloud. Of all the technologies that have transf ormed small-, mid-, and large-cap companies, nothing quite compares to the cloud a blanket term for the networks of data centers that have expanded the digital universe by delivering services over the Internet. More than $1 trillion in inf ormation technology (IT) spending will be directly or indirectly af f ected by the shift to the cloud during the next five years, said Gartner, Inc., a technology research firm. This will make cloud computing one of the most disruptive forces of IT spending since the early days of the digital age. "Cloud-f irst strategies are the f oundation f or staying relevant in a f ast-paced world," said Ed Anderson, research vice president at Gartner. "The market f or cloud services has grown to such an extent that it is now a notable percentage of total IT spending. (See Table 1.) Whether it s sof tware, hardware, networking, or services, cloud computing is redef ining the entire IT industry, said Lord Abbett research analyst Rick Vallieres. In the process, cloud computing has also enabled strong growth in a number of sectors in a relatively slow economic environment. Today, we see leading-edge tech companies which were born in the cloud and have transf ormed 1

2 their respective markets, he added. Others are providing the platf orm f or innovative start-ups to expand at a rapid clip. As the CEO of one software service company born in the cloud put it, Cloud computing is a better way to run your business. Among the many benefits are cost savings for both providers and customers; pay as you go pricing, resource flexibility, and ease of use and speed of deployment. For Lord Abbett equity portf olios, cloud exposure means inclusion of companies across the capitalization spectrum. Large-cap names dominate the inf rastructure as a service market, said Vallieres, but throughout the market caps are companies that build on cloud, deliver their applications f rom the cloud [sof tware as a service], and provide services to help customers transition to cloud. Table 1. Cloud Shift Summary, by Market Segment Source: Gartner, July 016. Note: BPaaS = business process as a service; IaaS = inf rastructure as a service; PaaS = platf orm as a service; SaaS = sof tware as a service. The Expanding Public Cloud While overall capital investment may be sluggish, recent research f rom International Data Corporation (IDC) shows worldwide revenues f rom public cloud services (e.g., social media, e- commerce services, digital content) alone reaching more than $195 billion in 00. This would be more than double the $96.5 billion in revenues f orecast f or 016, and represents a compound annual growth rate of 0.4% over the f orecast period. Cloud sof tware which comprises sof tware applications as a service (SaaS), system inf rastructure software (SIS) as a service, and platform as a service (PaaS) was responsible for 8.7% of all public cloud revenue in 015, with the remaining 16.% belonging to inf rastructure as a service (IaaS), IDC said. However, IaaS and PaaS revenues are forecast to grow at a faster rate than SaaS, expanding their share of overall revenues in the process. "Cloud sof tware will signif icantly outpace traditional sof tware product delivery over the next f ive years, growing nearly three times faster than the software market as a whole, and becoming the signif icant growth driver to all f unctional sof tware markets," said Benjamin McGrath, an IDC senior research analyst. "By 00, about half of all new business sof tware purchases will be of serviceenabled sof tware, and cloud sof tware will constitute more than a quarter of all sof tware sold."

3 Industries leading the way in public cloud-services spending are discrete manuf acturing, banking, and prof essional services, which collectively represent nearly one-third of total worldwide revenues in 016 (to date), IDC added. The industries poised for the fastest revenue growth over the five-year forecast are media, telecommunications, and retail, IDC added. However, all 0 of the industries prof iled in the IDC spending study are expected to see revenue growth of more than 100% over the f orecast period. "Cloud computing is breaking down traditional technology barriers, as line-of-business leaders and their IT organizations rely on the cloud to flexibly deliver IT resources at the lower cost and faster speed that they require, said Eileen Smith, IDC program director, customer insights, and analysis. Organizations across all industries are now f ree to adapt to market changes quicker and take more risks, as they are no longer bound by legacy IT constraints." Cloud Builders and Enablers Cloud builders represent the most f undamental f orm of cloud computing. In assembling the building blocks of a highly adaptable warehouse-like inf rastructure, these tech whizzes essentially reduce the cost of capital investment f or established companies. They also make it easier f or entrepreneurs to create new businesses by tapping into powerf ul computing resources at remote multi-tenant data centers using low-cost commodity hardware and virtualization. Inf rastructure is the f oundation that connects all the clouds private [corporate applications and data], public, and home [devices like smart meters, wireless thermostats, Internet-enabled TVs], said one provider of end-to-end provider solutions. Companies that specialize in cloud inf rastructure have seen very strong growth. One of the biggest players in this space is the world s dominant e-commerce retailer, which leveraged its domain expertise and started a web services division in 006. By of f ering low-cost, expandable platf orms and applications on demand to other companies, that rapidly growing division has become the outsourced cloud services company to beat. Among other secular growth stories in this space are a global purveyor of high-perf ormance data centers and network services and a pioneering maker of storage memory platf orms. Then there's a provider of virtualization sof tware that vastly expands the capacity of Internet servers, supports the entire lif ecycle of large-scale sof tware development and storage on a single platf orm at potentially huge cost savings, and in turn allows a company to leverage its existing customer base. Now that all this laborious inf rastructure is in place, platf orms that allow people to interact, play, create, learn, or do business on multiple levels have morphed into global household names. "Big Data" Moves to the Cloud Should Spur More Disruptive Innovation No discussion of the cloud would be complete without mentioning "Big Data," a ref erence to companies powered by the latest open-ended sof tware that makes machine-generated data accessible, usable, and valuable to everyone in a timely manner. There are many applications of such technology, but the most recognizable include transaction oversight f or online businesses providing round-the-clock operations; tracking web activity and web asset-usage data to gain customer intelligence; and monitoring social media networks to identif y trends and gauge sentiment. When it comes to storage, discrete manuf acturing, with its enormous demand f or automation technology, has one of the largest appetites f or data storage, f ollowed by government, communications, and media. Laggards include the banking, healthcare, and the securities/investment sectors, where the need to protect incalculable amounts of critical information is further complicated by ever-changing regulatory requirements. Risks

4 For all the popularity of the rapidly expanding public cloud, some companies are adopting a hybrid approach of keeping some of their IT inf rastructure in-house in a private cloud, given the enormous expense of transf erring tremendous amounts of data to a new location, while developing newer, strategic applications on offsite servers. In the f inancial services industry, f or example, some companies pref er a private cloud over the public cloud, given regulatory impediments and a need f or control of their data, Vallieres explained. Others are moving f orward with public cloud f or certain applications, while staying within regulatory allowances to prove their data is adequately protected. Whatever the industry, there is still a raging debate about the economic advantages of the public cloud versus the private cloud. One major player is trying to bridge both technologies, saying its approach is built f or both closed source and open source operating systems and can make both of them harmonize with each other. And when it comes to putting applications in the public cloud, some companies are discovering that they can turn around and repackage and sell such apps to their own customers. Most companies have a pretty solid idea of what they re going to do in the cloud, and they know the steps to get there, said Vallieres. It s a time of enormous change in the industry, and the pressure on internal IT departments to deliver public cloud-style f lexibility and economics is escalating. 1 "Worldwide Public Cloud Services Spending Forecast to Reach $195 Billion by 00, According to IDC," BusinessWire, August 10, 016. "Marvell s All-Encompassing Cloud Services Solutions Power the Connected Lif estyle f or Businesses and Consumers," PR Newswire, May 7, 01. Kash Rangan, Milesh Dhruv, and Jaimin Soni, "The Cloud Wars: From Disruptive to Pronounced to Tectonic," presentation, Bank of America Merrill Lynch Global Research, May 1, 010. The inf ormation provided here is f or general inf ormational purposes only. It doe s not constitute a recommendation nor investment advice, and should not be used as the basis f or any investment decision. This is not a representation of any securities Lord Abbett purchased or would have purchased or that an investment in any securities of such issuers would be prof itable. This article may contain assumptions that are f orward-looking statements, which are based on certain assumptions of f uture events. Actual events are dif f icult to predict and may dif f er f rom those assumed. There can be no assurance that f orward-looking statements will materialize or that actual re turns or results will not be materially dif f erent f rom those described here. Investing involves risk, including possible loss of principal. The value of investments in equity securities will f luctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy. Small-cap company stocks tend to be more volatile and can be less liquid than large cap company stocks. Small and Mid-cap companies may be less able to weather economic shif ts or other adverse developments than larger, more established companies and may have less experienced management and unproven track records. Small and Mid-cap companies may rely on limited product lines, may have more limited f inancial resources, and may be more susceptible to setbacks or economic downturns. Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee. The opinions in the preceding commentary are as of the date of publication and subject to change based on subsequent developments and may not reflect the views of the firm as a whole. This material is not intended to be legal or tax advice and 4

5 is not to be relied upon as a forecast, or research or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. Investors should not assume that investments in the securities and/or sectors described were or will be profitable. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy or completeness of the information. Investors should consult with a financial advisor prior to making an investment decision. Investors should carefully consider the investment objectives, risks, charges and expenses of the Lord Abbett Funds. This and other important information is contained in the fund's summary prospectus and/or prospectus. To obtain a prospectus or summary prospectus on any Lord Abbett mutual fund, you can click here or contact your investment professional or Lord Abbett Distributor LLC at Read the prospectus carefully before you invest or send money. Not FDIC-Insured. May lose value. Not guaranteed by any bank. Copyright 018 Lord, Abbett & Co. LLC. All rights reserved. Lord Abbett mutual funds are distributed by Lord Abbett Distributor LLC. For U.S. residents only. The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett s products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances. 5