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Above the cloud: investment opportunities across the value chain
KEY TAKEAWAYS
  • The transformative power of the cloud positions it as the catalyst for the fourth industrial revolution.
  • The cloud offers a scalable, high-performance, lower cost solution to data storage, and its potential to mobilise data and drive innovation opens up massive investment opportunities over the next 10 years.
  • Identifying the investment areas in all three layers of the cloud value chain (enablers, solution providers and beneficiaries) can help to more effectively flag the opportunities and risks for companies positioned to harness the power of the cloud.

Cloud: the catalyst for the fourth industrial revolution


Every prior industrial revolution has had a catalyst followed by transformational change. Steam enabled mechanisation in the first industrial revolution, electricity led to mass production in the second, while technology droveautomation in the third. The cloud’s transformational power gives it the ability to rewire the global economy and be the catalyst for the fourth industrial revolution.


The broad application of the cloud’s transformative innovation opens up massive investment opportunities over the next 10 years.


The future of data


I. Rapid growth and storage capacity


Around the world, more than 300 billion emails are sent and received every day.1 Elsewhere, a single autonomous vehicle produces about five terabytes of data every hour.2 In 2020 alone, 64 zettabytes3 of data was created globally, where 1 zettabyte is 1 billion terabytes.


As our digital data continues to grow at a rapid pace, storage management will become increasingly crucial. The cloud,a source of cheaper and better IT infrastructure and data storage, becomes a viable option as it optimises capacity, so companies only pay for actual usage.


II. Mobilisation of the data pool


While the cloud provides a great solution for data storage, its true potential comes from how the huge amounts of data are analysed and used in a collaborative manner to deliver insights and drive innovation.


We are already seeing the tangible application of data mobilisation in apps like Google Maps. Map co-ordinates, satellite images, photos and data are all stored in the cloud, but the real potential only emerges when an artificial intelligence engine integrates, analyses and synthesises thelayers of data and images into usable output. The result has transformed the way we get from A to B.


Ways to invest in the cloud


The implications of the democratisation of data and enablement of cloud technology are vast. So, how do you structure exposure from an investment perspective?


We have identified opportunities along the cloud value chain framework, which breaks down cloud technology into three layers.


Source: Capital Group

1. Enablers


We are already in the midst of the transition to the cloud. As we see broader migration and adoption, there will behigher demand for the components driving these processes. And as the cloud supports more complex computation and analytics, there is greater demand for higher performance components.


2. Semiconductors – an attractive industry structure


It’s difficult to overstate how important semiconductors have become to the global economy. They are needed in everything from data centres and smartphones to cars and washing machines.


While the semiconductor industry’s customer base has expanded, the number of industry participants has consolidated. Today the semiconductor industry has only a few dominant players. Essentially an oligopoly, it is an industry that has demonstrated steady growth, high margins and lower cyclicality. This is a solid set of underlying fundamentals for long-term investment opportunities.


Semiconductor equipment maker ASML and semiconductor manufacturer TSMC are leaders in the industry. Superior technology coupled with strong operational execution has meant TSMC now holds close to 80% market share for leading edge chip production, 4 while ASML is essentially the only manufacturer of extreme ultraviolet lithography (EUV) machines used to make advanced chips.


 


1. As at February 2021. Source: Statista


2. As at January 2020. Source: Dell Technologies (connected car is measured as a car “under task per hour”)


3. As at March 2021. Source: IDC


 

Risk factors you should consider before investing:
  • This material is not intended to provide investment advice or be considered a personal recommendation.
  • The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
  • Past results are not a guide to future results.
  • If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease. Currency hedging seeks to limit this, but there is no guarantee that hedging will be totally successful.
  • Depending on the strategy, risks may be associated with investing in fixed income, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.


 

Past results are not a guarantee of future results. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.