- The adoption of cloud computing has quickly become a key driving force for businesses today. Vitali, what can you tell us about the state of the cloud market today?
- Hey, Tony. The state of the cloud is incredibly healthy and much to the surprise of many observers. Recall 2020, you had spending collapse across enterprises and industrial markets, and just about everywhere there were some tough months and quarters. The cloud persevered, and it underscored the need for companies to have modern technology stacks to underpin their operations. And as a result, we saw cloud spending actually grow at a very, very healthy clip to a very large size.
- And so we know the revenues are significant, but do you think that they can still grow at this stage?
- Yeah, the revenues are very significant. So we're talking about $77 billion in total, really, into infrastructure base level cloud spending between the big three players of Amazon AWS, Microsoft Azure, and the Google Cloud platform. And so it does make people pause a little bit and say, hang on a second, $77 billion, that's a big number. $21 billion in new revenue just in 2020, can we keep growing?
The reality is that the IT market for enterprise spending is north of half a trillion dollars and some say as much as a trillion. And so when you look at the current trends, what companies are talking about as far as consuming cloud resources, meaning the shift to the cloud and what the clouds themselves are guiding to, we think there's a number of years of healthy 20% plus growth ahead.
- And talk to us about the phenomenon of size versus growth, and whether it can really continue given how big it is right now.
- Well, that's the thing, we oftentimes look at the size of something and say, OK, well, the investment basis is over, a company has gotten so large, without looking at the underlying. And so if we actually look at the number of new dollars that are migrating to the cloud every year, that number keeps increasing year-over-year.
So in a year like 2020, again, with the pandemic, with economic damage to the majority of companies in the world, you still saw $21 billion in new cloud spending, incremental from 2019. And that was more than you had ever seen. 2021, by our estimates, is going to be another year of record new cloud growth. Now it comes back to that really large, half a trillion plus enterprise spending, and really that's being set and catalyzed into cloud spending by some of these digital transformation trends or a new way of really living and doing work that need, really, the cloud to enable it.
- And so we know tech companies are notorious for losing money. Can these clouds actually turn a profit?
- Yes, tech companies do have the stereotype of liking to spend a lot but maybe not always writing the checks back to shareholders. The cloud is, you could say, a bit of an outlier. The clouds, the majority of them are actually very profitable. So Amazon does a good job of disclosing their AWS segment. I mean, this is a business at 30% operating margins already. That's better than the vast majority of standalone companies in the S&P 500.
Microsoft is a little more, call it opaque with disclosure, but nonetheless, we think that's turning nicely positively. Google is the only one that really disclosed massive losses. But again, as you can see from the charts, they're much smaller, they're ramping up. And we kind of have an end state of where they can go with those margins based on the growth and the path that has been said by Amazon and Microsoft.
- So what's one way for investors to get exposure to this sector?
- Well, if you want to participate in the trends of the cloud, the three major infrastructure players that we've been discussing today, these are three large companies that do the cloud as well as some other things that we all know about. And then the other end to that is, I would say, the platforms and the software and everything that companies then build on top of that goes to software vendors, for example, like a salesforce.com or even a Shopify, which runs on a Google Cloud. And so a lot of this ecosystem we think we have in our TD Global Technology Leaders Index ETF. These are some of the bigger holdings in the ETF.
- Vitali, thank you very much for your time.
- Oh, thanks, Anthony, it was a pleasure.