Global tech: gaining from the growing dominance of cloud infrastructure



​Alison Porter, portfolio manager in Henderson’s Global Technology Team, discusses the disruptive trend of cloud infrastructure, and explains why it is a long-term growth trend worth banking on.

A disruptive technology displaces an established technology, shakes up an industry or is a ground-breaking product that can create a whole new industry. The move to cloud infrastructure has the potential to be one of the most disruptive trends in technology over the next 20 years and is among the current investment themes in the Henderson Global Technology Strategy.
What is cloud infrastructure?
Historically most companies managed their IT resources (servers, storage, devices and networking equipment) as well as the software (infrastructure and applications) on their own premises. Public cloud refers to datacentres that are operated by third parties and located away from the company’s own premises. These large data centres typically run on shared or standardised technology equipment (storage, networking, servers, and databases) optimised for maximum usage and have more than one customer/tenant sharing the infrastructure.  We continue to see other cloud infrastructure models emerging including private cloud ( shared resources and only one tenant) and hybrid cloud (a mix of cloud and traditional owned on site  IT). 
Why move to the cloud?
The concept of public cloud was introduced by Amazon via Amazon Web Services (AWS). The idea of shared online IT resources began initially as a cost saving tool with a per minute billing structure for compute and storage capacity.  This ‘rent rather than buy’ structure shifts IT spending from capital budgets to operating expenditure and has been very popular with start-up internet companies. Public cloud provides upfront cost savings and enables rapid growth as clients have the flexibility of provisioning IT capacity on demand.
Cloud infrastructure has helped to lower IT infrastructure costs for new companies. Many internet start-ups (eg. Uber, Spotify, and Airbnb) have grown rapidly and the cloud model is now increasingly being adopted by large corporates looking to reduce costs and increase flexibility particularly in the testing and development phase of new products.   In 2014, The US Central Intelligence Agency (CIA) announced that they would move their data to a cloud infrastructure.  A move viewed as an endorsement of the security features of the cloud. General Electric and Newscorp are among other large companies that have announced they will be moving the majority of their IT workloads to a public cloud structure over the next three to five years.
A sizeable and rapidly growing market
Estimates of the size of the cloud infrastructure market appear conservative to us as these numbers represent only a small proportion of overall enterprise IT spending. The model’s features and functionality available in cloud infrastructure are expanding rapidly, growing the addressable market for cloud infrastructure. This is having an increasing impact on legacy technology companies, most notably on the sale of legacy hardware, where incumbents are reorganising themselves to compete better (eg. the acquisition of EMC by Dell and the break up of Hewlett Packard).  It is important to note that while we are optimistic on the growth of cloud infrastructure we do not believe that 100% of IT workloads will be moved on to a cloud infrastructure.  There are many companies that will want to maintain part or all of their IT on their own premises for scale and control reasons hence the popularity of other cloud models such as hybrid cloud.
Size of public cloud market

Source: Goldman Sachs, data as at January 2015.
Scale driving profitability for Amazon Web Services

Source: Stifel, company reports, data as at 30 September 2015. Past performance is not an indicator of future performance.


Stock implications 

The cloud infrastructure market remains in its early stages. Amazon invested early and heavily, and in 2015 AWS’s cloud business was more than four times the size of the second largest player - Microsoft’s (Azure). Both Microsoft and Alphabet (formerly Google) are now investing heavily to play catch up. Notably, while cloud infrastructure is an important driver of Amazon’s profitability, it remains a very small part of Microsoft and Alphabet’s business. The amount of capital required to operate and scale a cloud business creates significant barriers to entry for other smaller players. We believe that after initially competing on price for compute and storage services, competition is now evolving to the creation of new products and functionality; with Alphabet, Microsoft and Amazon the winners in their own niches. These three stocks feature in our strategy’s cloud infrastructure theme as we expect these companies to dominate the growth of cloud infrastructure over the next five years. The IT needs of these three companies with ‘hyperscale‘ data centre environments are different from traditional enterprise buyers as they are technically more self-sufficient and require less sales and services support than traditional IT buyers. Companies like Arista Networks and Broadcom (both also held in our portfolios) design products specifically for these ‘hyperscalers’ and so also benefit from growth in cloud infrastructure.

References made to individual securities should not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

For promotional purposes.

Important information

Please read the following important information regarding funds related to this article.

Janus Henderson Horizon Global Technology Fund

The Janus Henderson Horizon Fund (the “Fund”) is a Luxembourg SICAV incorporated on 30 May 1985, managed by Henderson Management S.A. Any investment application will be made solely on the basis of the information contained in the Fund’s prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the Fund’s prospectus and key investor information document before investing. A copy of the Fund’s prospectus and key investor information document can be obtained from Henderson Global Investors Limited in its capacity as Investment Manager and Distributor.

Issued by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier).

We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Past performance is not a guide to future performance. The performance data does not take into account the commissions and costs incurred on the issue and redemption of units. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially.

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

The Fund is a recognised collective investment scheme for the purpose of promotion into the United Kingdom. Potential investors in the United Kingdom are advised that all, or most, of the protections afforded by the United Kingdom regulatory system will not apply to an investment in the Fund and that compensation will not be available under the United Kingdom Financial Services Compensation Scheme.

Copies of the Fund’s prospectus and key investor information document are available in English, French, German, and Italian. Articles of incorporation, annual and semi-annual reports are available in English. Key Investor document is also available in Spanish. All of these documents can be obtained free of cost from the local offices of Janus Henderson Investors: 201 Bishopsgate, London, EC2M 3AE for UK, Swedish and Scandinavian investors; Via Dante 14, 20121 Milan, Italy, for Italian investors and Roemer Visscherstraat 43-45, 1054 EW Amsterdam, the Netherlands. for Dutch investors; and the Fund’s: Austrian Paying Agent Raiffeisen Bank International AG, Am Stadtpark 9, A-1030 Vienna; French Paying Agent BNP Paribas Securities Services, 3, rue d’Antin, F-75002 Paris; German Information Agent Marcard, Stein & Co, Ballindamm 36, 20095 Hamburg; Belgian Financial Service Provider CACEIS Belgium S.A., Avenue du Port 86 C b320, B-1000 Brussels; Spanish Representative Allfunds Bank S.A. Estafeta, 6 Complejo Plaza de la Fuente, La Moraleja, Alcobendas 28109 Madrid; Singapore Representative Janus Henderson Investors (Singapore) Limited, 138 Market Street #34-03/04 CapitaGreen, Singapore 048946; or Swiss Representative BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich who are also the Swiss Paying Agent. RBC Investor Services Trust Hong Kong Limited, a subsidiary of the joint venture UK holding company RBC Investor Services Limited, 51/F Central Plaza, 18 Harbour Road, Wanchai, Hong Kong, Tel: +852 2978 5656 is the Fund’s Representative in Hong Kong.

Information on this document is on Janus Henderson Investors' best endeavours.

Specific risks

  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • Changes in currency exchange rates may cause the value of your investment and any income from it to rise or fall.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • The Fund's value may fall where it has concentrated exposure to a particular industry that is heavily affected by an adverse event.
  • Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.

Risk rating


Important message