Microsoft Corporation’s (NASDAQ:MSFT) earnings report Friday confirms a trend that we’ve seen growing over the past couple years. The cloud computing business is big. Companies are transforming their business models to shift to the cloud and many are reaping big results.
Amazon.com, Inc.’s (NASDAQ:AMZN) industry-leading Amazon Web Services business is on pace to generate more than $10 billion in annual revenue, and now accounts for more than half of the company’s total operating income. Alphabet Inc (NASDAQ:GOOGL) has reported 30% year over year growth in its “Other Revenue” segment, which includes Google’s cloud platform. Even old technology names such as IBM (NYSE:IBM) and Oracle (NASDAQ:ORCL) have seen impressive growth in their burgeoning cloud businesses.
These names are all included in the First Trust ISE Cloud Computing Index ETF (NASDAQ:SKYY) — the only ETF in the marketplace that invests solely in companies that generate a significant percentage of their revenue from the cloud computing space.
Recent research by IDC suggests that revenues from cloud software and infrastructure could still be in its early stages. Companies will generate an estimated $96 billion in cloud-based revenue in 2016. That number is expected to grow roughly 20% a year until 2020 when cloud revenue is expected to reach roughly $200 billion. Cloud computing’s two major components, software as a service (SaaS) and platform as a service (Paas), comprise roughly 83% of the segment’s total revenue with the third component, infrastructure as a service (IaaS), owns the remaining 17%. IaaS is expected to grow the most over the next several years.
Despite the relatively recent emergence of the cloud, the Cloud Computing ETF has been around for more than five years. Since inception, the fund has returned a total of 69%, trailing the 78% gain of the S&P 500 during the same time frame. The fund’s expense ratio of 0.60% is a little on the high end but the fund’s $600 million in assets proves there is investor demand for this type of product.
While the fund allocates a large percentage of its assets to pure cloud plays, it also invests in non-pure plays and other tech conglomerates operating within the space. It’s a good thing too because those non-pure plays have actually helped prop up the fund’s returns in 2016. Pure cloud companies like Salesforce.com (NYSE:CRM) have seen explosive growth in recent years but evidence is showing that growth is starting to slow. Conversely, companies like IBM, which operates in the traditional computing space and has seen several quarters of declining year over year revenue growth, have gotten a boost as it expands its cloud business.
Picking which companies will emerge as the long-term winners in the cloud computing space will likely prove difficult making a broadly focused ETF like SKYY a better choice. The combination of pure cloud businesses and tech conglomerates expanding their cloud presence makes sense since this area could be facing a wave of consolidation at some point over the next couple years.
SKYY shares closed at $34.12 on Friday, up $0.18 (+0.53%). Year-to-date, SKYY has gained 13.58%, versus a 4.96% gain in the benchmark S&P 500 during the same period.
He has written for Seeking Alpha, Motley Fool, ETF Trends and Investopedia and was also included in the panel for ETFReference.com’s “101 ETF Investing Tips from the Experts”. He has a B.A. in Finance from Michigan State University and lives in Wisconsin with his wife and two daughters.