InterCloud Systems Inc. (ICLD)

[makinezmoney]

Cloud computing to grow to $160Billion by 2020

By Ryan Vlastelica Cloud computing market is expected to reach $159.28 billion by 2020: Statista Demand for cloud-computing services is sky-high. Last week, Microsoft Corp. (MSFT) reported blowout quarterly results that sent the tech icon's stock to a new record (http://www.marketwatch.com/story/microsofts-stock-sets-record-as-analysts-hail-it-as-a-comeback-kid-2016-10-21), and a primary driver of the strength was Azure, its cloud-computing unit. Sales grew 116% in that division from the prior year, the latest quarter where Azure sales more than doubled. Companies finding growth from cloud services--or, the online storage of digital data--has become a trend. Last month, Oracle Corp. (ORCL) posted revenue growth of 2% in its latest quarter --but cloud revenue growth of 59% (http://www.marketwatch.com/story/oracle-misses-estimates-though-cloud-sales-rise-2016-09-15). In its most recent quarter, Amazon.com Inc. (AMZN)--one of the biggest players in the space--reported sales of $2.89 billion (http://blogs.marketwatch.com/thetell/2016/07/28/amazon-earnings-put-focus-on-prime-service-aws-live-blog/)for Amazon Web Services, its enterprise cloud division. That represented growth of nearly 60% for the segment. According to Statista (https://www.statista.com/statistics/510350/worldwide-public-cloud-computing/), the size of the public cloud computing market is forecast to reach $159.28 billion by 2020, compared with $96.98 billion in 2015. Amid this environment, the First Trust ISE Cloud-Computing Index Fund (SKYY)--the only exchange-traded fund that tracks the cloud-computing industry--has been on a serious uptrend. It is up 14.5% in 2016, easily topping the 5.2% gain of the S&P 500 , and it hit a new all-time high of $34.45 on Monday. Over the past month, $11.7 million has flowed into the $587.4 million fund, according to FactSet data. However, year-to-date flows remain negative, with $18.5 million withdrawn. Cloud computing has "the potential to profoundly transform the structure of our economy, disrupt existing business models, but also create substantial growth opportunities for those well positioned to participate," UBS wrote in a September note that highlighted the ETF with the investment time horizon of a decade. Read:Yahoo, Dropbox hacks puts cybersecurity ETFs squarely in focus (http://www.marketwatch.com/story/the-dropbox-hack-puts-cybersecurity-etfs-squarely-in-focus-2016-09-01) While the industry's prospects are rosy, the fund does come with some risks. It offers high levels of growth--the components have average annual revenue growth of 11.1%, according to FactSet data, compared with 2% for components of the SPDR S&P 500 ETF (SPY), which tracks the broader equity market--but also high valuations. The average price-to-earnings ratio for the fund's components is 53.1, nearly twice the 28.1 P/E of the S&P 500 ETF. "These aren't companies that people would expect to be value companies, so the valuations are only important if they fail to achieve the growth that's expected," said Ryan Issakainen, senior vice president and ETF strategist at First Trust, who added that he expects long-term growth of 15% to 20% for the industry. "This is a longer-term secular trend where technology is shifting away from a big computer on your desk to everything operating out of the cloud." Another issue is that several of the ETF's biggest components aren't pure plays, meaning cloud computing isn't their primary business. The risk of this is that the fund is liable to move on issues unrelated to its theme. While Amazon got more than half of its operating profit from AWS in its most recent quarter, that division comprised less than 10% of its total revenue. Still, the stock--which is classified as a consumer discretionary stock due to its e-commerce division--represents the fund's sixth-largest holding, accounting for about 4.1% of the portfolio. See also: Online retail ETF's rally demonstrates the shift away from brick-and-mortar shopping (http://www.marketwatch.com/story/online-retail-etfs-rally-demonstrates-the-shift-from-brick-and-mortar-shopping-2016-09-20) Oracle is the fund's 19th largest holding, at 3.27%, while Microsoft represents 2.72%, meaning investors in the fund saw limited direct upside from the growth in Azure. Issakainen said the index the ETF tracks--the ISE Cloud Computing Index--allocates its holdings into three categories: pure plays, non-pure plays, and technology conglomerates, where the cloud-computing division represents a small percentage of the company's total revenue. Only 10% of the portfolio is allocated to conglomerates. Amazon, he added, was classified as a pure play given its size within the cloud-computing space, even though that division was dwarfed by the company's retail segment. "There's some subjectivity that goes into it," he said. -Ryan Vlastelica; 415-439-6400; [e-mail] (END) Dow Jones Newswires 10-24-16 1437ET Copyright (c) 2016 Dow Jones & Company, Inc.