Post #65: Every cloud has a silver lining

Most people, your author included, have wondered which areas of the world might be unaffected by the havoc currently being wrought by the COVID-19 pandemicIT spend would seem a good candidate, for when we are stuck at home, many of us are still working (or trying to). If not, then home-schooling (if you’re lucky) and the binge-watching of Netflix (almost certainly) are data-hungry activities.

However, the reality is more complex. We had a conference call with an IT industry expert last week. Whereas most forecasts at the beginning of the year assumed low single-digit growth in global IT spend during 2020, it now looks likely that that this figure will contract by at least 5%, equivalent to the tune of more than $200bn of reduced spend. Even in mid-March – before the crisis really began to escalate – some 15% of CFOs interviewed by Gartner said that they planned to reduce their IT spend in 2020 by over 10%. The above figures are almost certainly markedly higher now. Few new devices (whether PCs, laptops are mobiles) are currently being purchased by corporates, while almost every non-essential IT project is being deferred if not cancelled.

There is some good news. Growth in hyperscale cloud expenditure is showing no sign of slowing down. As more data are produced and consumed (over 300bn emails are sent every day, globally, for example), they need to be processed and stored. Hyperscale cloud, simply defined, relates to the architecture that scales appropriately as increased demand is added to the system; think of it as high-performance computing with high availability and low redundancy. In other words, it works unfailingly.

Even with heightened global uncertainty, current consensus forecasts assume that over $100bn will be spent in 2020 on hyperscale cloud projects (or similar) by the eight largest players in the industry, per Bloomberg data. Listed alphabetically, Alibaba, Amazon, Apple, Baidu, Facebook, Google, Microsoft and Tencent have both size and strong cash balances in their favour. Beyond data demand, do not forget that almost all new technological developments – from 5G to autonomous cars – will be cloud-native; designed in and powered from cloud servers.

Heptagon Capital is an investor in Alibaba and Microsoft. The author of this piece has no personal direct investment in any of these businesses. Past performance is no guide to future performance and the value of investments and income from them can fall as well as rise.


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