Alibaba & The cloud – The leading indicator

The cloud theme likely to stay despite a return to work. 

• Alibaba is doubling its investments in the cloud following the pandemic in China in a clear sign that the acceleration of cloud usage is a trend that is here to stay.
• The shift towards cloud computing has been a steady secular trend over the last several years but the enforced home working and homeschooling experiment have caused such a large jump in traffic that capacity is already becoming stretched.
• China’s Internet largely survived the lockdown that happened in January and February and is gradually returning to work making it a reasonable yardstick for what might happen elsewhere.
• In the absence of a vaccine, things can not go back to the way they were before because the vast majority of people do not have immunity to the SARS-Cov2 virus.
• Hence, a staggered approach to work, business and school re-openings are likely to be combined with a rota system in offices.
• In order to maintain the space between workers, many offices in China are operating a rota system where 50% of staff are in the office one day and the other 50% the next day and so on.
• The effect of this is that 50% of the workforce is still at working from home at any one point in time.
• I suspect that Western economies will follow a similar pattern as it enables both social distancing at work and potentially on public transport as well.
• This will lead to a slowing of the growth of the cloud from the huge jump seen as everyone locked down in March and April, but it will remain at elevated levels.
• Hence, I suspect that all cloud players will announce substantial increases in investments in their cloud businesses at their Q1 2020 results along with increased revenue and expectations for growth.
• Effectively what has happened is that future growth in the cloud has been pulled forward into the present and given the likelihood of no vaccine making an appearance before the end of 2021 in real volume, means that this is going to be a 12-24 month trend.
• Once there is a vaccine and everyone goes back to work as they did in 2019, then I would expect a pause as cloud traffic drops and the underlying shift towards the cloud slowly fills up the vacated capacity.
• However, in the meantime, this is a strong growth trend that is unlikely to hit the buffers for some time to come.
• Microsoft, Amazon and Alibaba are the main players here and while Amazon has all the momentum, Microsoft is arguably best exposed.
• This is because Microsoft has Microsoft Teams video conferencing which is doing well, Xbox benefitting from quarantine entertainment and Windows operating system from the laptop jump in addition to being the global No. 2 cloud offering, Azure.
• Microsoft’ shares have lagged Amazon’s recovery and it remains the most attractive of the two.
• However, given the momentum of the minute and the market’s current complete disregard for any kind of valuation metric, I would want to hang onto all three.