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Should you be considering investing in cloud computing stocks despite the tech rout?

When stock markets crash, it is generally the “most expensive” stocks that suffer most and see the biggest drops in their valuation. Investor psychology…

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When stock markets crash, it is generally the “most expensive” stocks that suffer most and see the biggest drops in their valuation. Investor psychology means that risk appetite plunges when investors are presented with losses. Stocks with valuations seen as stretched, usually because hopes were high for future growth in revenues and profits when markets were feeling optimistic, usually drop quickest.

That often starts a tailspin as more investors sell out in protest at losses incurred (even if they are still in profit over the lifetime of the investment), depressing valuations further.

It’s a scenario veteran investors will be familiar with from the dotcom crash in 2000 and, though less tech-centric, the stock market plunge of 2008/09 during the international financial crisis.

The high growth tech sector has also suffered badly this time around and, like in 2000, has led the stock market slump of 2022. The tech-focused Nasdaq index is, despite something of a recovery over the height of summer, down almost 20% this year and many analysts expect further pain before a sustainable recovery eventually establishes itself.

nasdaq composite

But while tech valuations were undoubtedly pumped up by a combination of years of easy money flooding the system, something in common with the run-up to the bursting of the dotcom bubble, there are also profound differences.

Ben Rogoff, the lead manager of the Polar Capital Technology Trust, which controls assets of around £3 billion, describes the lead-up to the dotcom crash as featuring a ”much higher level of capital intensity, a lack of profits — or, indeed, revenue — and a far briefer timeline between inception and initial public offering on the stock market”.

While it’s a description that does hold true for some tech stocks, EV start-ups spring immediately to mind, Mr Rogoff believes those factors are much less of an influence this time around. He is broadly hopeful about the general economic outlook and believes that “some of the inflation will, in time, be best understood as another pandemic hangover.”

If that turns out to be the case, inflation may start to drop with less aggressive interest rate hikes by central banks, especially the Fed, than were predicted a couple of months ago. That would be expected to benefit the suffering tech sector, especially companies with strong fundamentals (revenues and profits). However, it will most likely take longer for investors to return en mass to more speculative bets on companies that are yet to generate significant revenues or even profit.

Why cloud computing providers are expected to lead the tech recovery

There is one sub-sector of tech that many believe is particularly well-positioned to see valuations roaring back when market confidence starts to return – cloud computing providers.

Like the broader tech sector, cloud computing stocks suffered sharp falls in their valuations earlier this year. But there is a feeling among many analysts and market commentators that much of that was being swept up in the general market and sector sell-off. As Elliott Robinson, a partner at Bessemer Venture Partners recently stated “we haven’t seen the fundamentals of that basket of businesses really fall off a cliff”.

As a result, and after strong quarterly results and optimistic full-year forecasts, cloud companies have recently regained some ground. And in the mid-to-long term the prospects for cloud computing providers, and companies which offer products and services that enable cloud computing, look very positive.

It’s a generally high-margin sector that benefits from huge scaleability and the sector’s growth prospects for the next several years look very strong. Statista data indicates a 21.27% leap in revenues for public cloud service providers worldwide from $494.65 billion this year to $599.84 billion in 2023.

Public cloud services end-user spending worldwide from 2017 to 2023(in billion U.S. dollars)

market chart

Source: Statista

A research report by Market Research Future (MRFR), titled “Public Cloud Market”, states the market could be worth as much as $1386.14 billion by 2030, growing at a compound annual growth rate of 21.4%. That’s huge growth and possible because the cloud computing market is, while already huge, still at a relatively early stage in its maturity cycle as a sector.

Rogoff explains the remaining potential for growth for cloud computing companies with:

“The cloud is still, we believe, around mid-20s-penetrated, so there’s still three times more computing happening outside of the cloud than in the cloud. That says to me we should have years ahead of growth for those companies.”

Cloud computing sector stocks that are bouncing back strong

Almost all the cloud computing stocks and investment vehicles UK-based investors can target for significant or direct exposure to the market are U.S. based. The UK, and Europe, havn’t produced many really significant cloud computing companies yet, with the arguable exception of France’s OVHcloud, whose share price hasn’t yet shown any signs of recovery.

Some of the cloud computing market companies that have recently done well include:

GitLab

gitlab inc

GitLab develops tools that help software developers manage source code and saw its valuation plunge by 75% during the tech sell-off that played out between November and April this year. However, despite missing analysts’ forecasts, the company registering 75% year-on-year revenue growth in its latest set of result saw Goldman Sachs upgrade its rating on the stock from the equivalent of hold to buy, writing in a note to investors:

“In the near-term, GTLB is likely to see a more steady demand backdrop (relative to discretionary and complex IT solutions) as it provides key cost savings and operational efficiencies.”

The company’s share price has doubled in three months and could have plenty of growth left in it over the next several years.

Confluent

confluent inc

Another big gainer in the cloud computing sector has been data processing software developer Confluent, which is up around 80% since mid-May and earlier this month posted 58% revenue growth for the second quarter. It also forecast growth for the year to be a minimum 46%.

Confluent has riden out the storm because, as CEO Jay Kreps told analysts at the most recent earnings call, its technology:

“…sits in the operational stack powering applications that directly serve critical business operations and real-time customer experiences. Given this criticality, it can’t be switched off without a complete disruption to the operations of the business.”

Atlassian

atlassian

Atlassian, which provides collaboration tools commonly used by software developers, is another stock closely tied to the cloud computing sector that has seen strong recent share price growth. Its valuation jumped 36% after Confluent’s quarterly results were published and has gained around 65% in the past three months.

Big Tech – Cloud Computing Providers

The three biggest public cloud computing platforms, Amazon Web Services (AWS), Microsoft Azure, and Google Cloud Platform, are owned by three of the world’s biggest companies. While they are now big enough and profitable enough that they are a big influence on the overall valuation of these companies (AWS has the biggest influence on its parent company’s valuation and Google Cloud Platform the least), the don’t offer direct exposure to the sector because they are one part of bigger groups.

Alibaba, IBM and Oracle are also larger tech groups with significant exposure to cloud computing.

amazon leads

Source: Statista

The Amazon share price is still down over 21% for the year and AWS’s dominant position in the public cloud market could make it worth a look at its current levels. There is also a chance that AWS will be spun out of Amazon as an independent company at some point, something which many analysts believe would see its valuation rocket.

A much higher margin business than retail, in 2021 AWS accounted for just 13% of Amazon’s revenue but nearly three-quarters of their operating profit. This year that share of the group’s operating profit will almost certainly rise again.

chart2

Source: The Visual Capitalist

WisdomTree Cloud Computing Fund

etf

Finally, broad, diversified exposure to the cloud computing sector can be achieved through the WisdomTree Cloud Computing Fund, which is exchange traded and invests in normally 90-100 companies exposed to the sector. However, one thing to keep in mind is that the fund is also invested in cloud computing sector companies heavily exposed to consumer spending, like Shopify, which are recovering less well.

There is a growing choice when it comes to investment exposure to the cloud computing market and it’s one investors would do well to have on their radar. Like the rest of the economy, the sector may still experience further volatility and potential valuation losses in the near term. But mid to long term, the successful companies in this sector should enjoy some of the best rates of growth available to investors.

The post Should you be considering investing in cloud computing stocks despite the tech rout? first appeared on Trading and Investment News.

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Global Wages Take A Hit As Inflation Eats Into Paychecks

Global Wages Take A Hit As Inflation Eats Into Paychecks

The global inflation crisis paired with lackluster economic growth and an outlook…

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Global Wages Take A Hit As Inflation Eats Into Paychecks

The global inflation crisis paired with lackluster economic growth and an outlook clouded by uncertainties have led to a decline in real wages around the world, a new report published by the International Labour Organization (ILO) has found.

As Statista's Felix Richter reports, according to the 2022-23 Global Wage Report, global real monthly wages fell 0.9 percent this year on average, marking the first decline in real earnings at a global scale in the 21st century.

You will find more infographics at Statista

The multiple global crises we are facing have led to a decline in real wages.

"It has placed tens of millions of workers in a dire situation as they face increasing uncertainties,” ILO Director-General Gilbert F. Houngbo said in a statement, adding that “income inequality and poverty will rise if the purchasing power of the lowest paid is not maintained.”

While inflation rose faster in high-income countries, leading to above-average real wage declines in North America (minus 3.2 percent) and the European Union (minus 2.4 percent), the ILO finds that low-income earners are disproportionately affected by rising inflation. As lower-wage earners spend a larger share of their disposable income on essential goods and services, which generally see greater price increases than non-essential items, those who can least afford it suffer the biggest cost-of-living impact of rising prices.

“We must place particular attention to workers at the middle and lower end of the pay scale,” Rosalia Vazquez-Alvarez, one of the report’s authors said.

“Fighting against the deterioration of real wages can help maintain economic growth, which in turn can help to recover the employment levels observed before the pandemic. This can be an effective way to lessen the probability or depth of recessions in all countries and regions,” she said.

Tyler Durden Mon, 12/05/2022 - 20:00

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Unprecedented Liquidations Lead To Historic Collapse In Investors’ Oil Exposure

Unprecedented Liquidations Lead To Historic Collapse In Investors’ Oil Exposure

By John Kemp, senior market analyst

Portfolio investors sold…

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Unprecedented Liquidations Lead To Historic Collapse In Investors' Oil Exposure

By John Kemp, senior market analyst

Portfolio investors sold petroleum heavily for the third week running as fears about disruption to crude oil flows from the price cap on Russia’s exports receded.

Hedge funds and other money managers sold the equivalent of 42 million barrels in the six most important oil-related futures and options contracts over the seven days ending on Nov. 29.

Sales over the three most recent weeks totalled 190 million barrels, more than reversing the 169 million barrels purchased over the previous six weeks in October and early November. As Bloomberg adds, money managers have trimmed positioning in Nymex crude for three weeks in a row. A breakdown of the data show the drop in positions is mostly from money managers cutting long exposure, rather than an abrupt short-covering.

In the latest week, sales were again concentrated in crude (-40 million barrels), especially Brent (-39 million), with only insignificant changes in other contracts.

Brent is the contract with the most direct exposure to the crude exports from Russia subject to the price cap announced by the United States, the European Union and their allies on Dec. 2.

Fund managers cut their net position in Brent to just 99 million barrels (6th percentile for all weeks since 2013) last week from 238 million barrels (50th percentile) on Nov. 8.

Bullish long positions outnumbered bearish short ones in Brent by a ratio of just 2.17:1 (11th percentile), down from 6.74:1 in late October (76th percentile).

The long-short ratio is the lowest for two years since November 2020, before the first successful coronavirus vaccines were announced a few weeks later.

Fears the price cap would reduce global crude supplies appear to have prompted a wave of buying in both physical and paper markets throughout late September and early October.

Precautionary buying drove front-month Brent futures up to a high of almost $99 per barrel on Nov. 4 from just $84 on Sept. 26. It also helped keep the futures market in a steep six-month backwardation.

But as it became clear the cap would be set at a relatively high level, with a relaxed approach to enforcement, this buying has reversed, causing prices and spreads to fall sharply.

With the risk from the price cap removed, for now investors’ attention has returned to the weak outlook for the economy and oil consumption in 2023.

Tyler Durden Mon, 12/05/2022 - 14:21

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The Gall Of Lockdowners Who Support China’s Anti-Lockdown Protests

The Gall Of Lockdowners Who Support China’s Anti-Lockdown Protests

Authored by Michael Senger via ‘The New Normal’ Substack,

If the intent…

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The Gall Of Lockdowners Who Support China's Anti-Lockdown Protests

Authored by Michael Senger via 'The New Normal' Substack,

If the intent was to get western elites to simultaneously support totalitarianism in their own countries while pretending to oppose it in China, then Xi Jinping has certainly made his point...

Across the political spectrum, voices have risen up in support of the Chinese people who’ve launched protests of unprecedented scale against the Chinese Communist Party’s indefinite Covid lockdown measures.

As well they should. Even by Chinese standards, the lockdowns that Xi Jinping pioneered with the onset of Covid are horrific in terms of their scale, their duration, their depravity, and the new totalitarian surveillance measures to which they’ve led. Anyone who participates in a protest in China runs a risk of being subject to cruel and arbitrary punishment. For ordinary Chinese people to brave that risk in defiance of this new form of inhuman medical tyranny is an act of courage worthy of admiration.

There are notable exceptions to the otherwise widespread support the protesters have received. Apple has been silent about the protests, and had the gall to limit the protesters’ use of a communication service called AirDrop in compliance with the CCP’s demands, even as it threatens to remove Twitter from its app store over Elon Musk’s free speech policy. This comes even after Apple has long ignored requests by FCC officials to remove the Chinese-owned app TikTok from its app store over unprecedented national security concerns. So Apple complies with requests by the Chinese government, but not the United States government. Let that sink in…

Apple is, unfortunately, far from alone in its CCP apologism. Anthony Fauci told CNN that China’s totalitarian lockdowns would be fully justified so long as the purpose was to “get all the people vaccinated.”

This kind of apologism for the CCP’s grisly bastardization of “public health” is horrific, especially coming from the man most widely seen as the leader of America’s response to Covid.

But what may be even more galling than this apologism is the widespread support China’s anti-lockdown protesters have received even among those who demonized anti-lockdown protesters in their home countries and wished their lockdowns were more like China’s.

In 2020, the New York Times denounced anti-lockdown protesters as “Anti-Vaxxers, Anticapitalists, Neo-Nazis” and urged the United States to be more like China.

But in 2022, the New York Times admired the bravery of China’s anti-lockdown protesters fighting Xi Jinping’s “unbending approach to the pandemic” that has “hurt businesses and strangled growth.”

In 2020, CNN published an open letter from “over 1,000 health professionals” denouncing anti-lockdown protests as “rooted in white nationalism” while admiring “China’s Covid success compared to Europe.”

But in 2022, CNN admired China’s anti-lockdown protesters as “young people” who “cry for freedom”

In 2020, the Washington Post denounced anti-lockdown protesters as “angry” populists who “deeply distrust elites,” and wished the United States was more like China.

But in 2022, the Washington Post celebrated global “demonstrations of solidarity” with China’s anti-lockdown protests.

In 2020, the New Yorker denounced anti-lockdown protesters as “militias against masks” while marveling at how “China controlled the coronavirus.”

But in 2022, the New Yorker admired the protesters standing up to Xi Jinping.

Earlier this year, Amnesty International issued a statement of concern about Canada’s anti-lockdown Freedom Convoy protests being affiliated with “overtly racist, white supremacist groups,” even as Justin Trudeau invoked the Emergencies Act to crush the protests.

But now, Amnesty International has issued a statement urging the Chinese government not to detain peaceful protesters.

These headlines are, of course, in addition to the hundreds of other commentators, influencers, and health officials, such as NYT journalist Zeynep Tufekci, who used their platforms in 2020 to urge for lockdowns that were even stricter than those their governments imposed, but now join in support for those in China protesting the same policies they were urging their own countries to emulate.

Etymologically, Zeynep’s latter comment makes no sense. Lockdowns had no history in western public health policy and weren’t part of any democratic country’s pandemic plan prior to Xi Jinping’s lockdown of Wuhan in 2020. Though some countries, such as Italy, imposed lockdowns shortly before the United States, their officials too had simply taken the policy from China. Thus, because no other precedent existed, any call for a “real lockdown” or a “full lockdown” in spring 2020 was inherently a call for a Chinese-style lockdown.

Though by “full lockdown” Zeynep may have intended somewhere in between the strictness of lockdowns in the United States and China, there was no way for any reader to know what that medium was; it existed only in her own head. Thus, the reader is left only with a call for a “full lockdown,” and the only example of a “successful” “full lockdown” that then existed was a full Chinese lockdown.

Zeynep’s latter comment further illustrates the efficacy of what was arguably some of the CCP’s most effective lockdown propaganda in early 2020: The ridiculous viral videos of CCP cadres “welding doors shut” so poor Wuhan residents couldn’t escape.

CCP apologists have argued that these videos prove the CCP was not trying to influence the international response to Covid, because they make the CCP look so bad. But on the contrary, the over-the-top inhumanity of the idea of welding residents’ doors shut was precisely the purpose of this propaganda campaign. The idea had to be so absurd that no decent government would ever actually try it. It thus gave the CCP and its apologists an infinite excuse for why lockdowns “worked” in China and nowhere else—because only China had ever had a “real lockdown” in which residents were welded into their homes.

When those with a decent knowledge of geopolitics or a bit of common sense see a graph like this, which looks nothing like that of any other country in the world, from a regime with a long history of faking its data on virtually every topic, the conclusion is obvious: China’s results are fraudulent. But to simple minds, a weld is a strong, durable bond capable of incredible feats, from supporting skyscrapers to spaceships. Surely, if a weld can do all that, then it must be able to stop a ubiquitous respiratory virus?

The entire concept is, of course, utterly asinine. You cannot stop a respiratory virus by indefinitely suspending everyone’s rights. But this idea that lockdowns had worked in China because the CCP had gone so far as to weld people into their homes was invoked over and over again during Covid, creating a limitless “No-True-Scotsman” out for lockdown apologists as to why lockdowns weren’t “working” anywhere except China. Whether COVID-19 cases went up, down, or sideways, the solution would always be the same: “Be more like China.”

The use of this darkly humorous propaganda campaign of welding residents into their homes speaks to two key points as to how Xi Jinping and CCP hawks like him view China’s relationship with the west. The first is that westerners will never respect the CCP; thus, you can make westerners believe anything so long as it confirms westerners’ prior belief that the CCP is barbaric.

Second, Xi Jinping sees the concepts of democracy and human rights as mere propaganda that western elites use to further their own self-interest. So long as they approve of a policy, then it’s not a human rights violation, but if they oppose it, then it is. It remains to be seen whether the response to Covid will, in the long run, ultimately advance Xi’s goal of making the world China. But insofar as the intent was to get western elites to simultaneously support totalitarianism in their own countries while pretending to oppose it in China, then he’s certainly made his point.

*  *  *

Michael P Senger is an attorney and author of Snake Oil: How Xi Jinping Shut Down the World. Want to support my work? Get the book

Tyler Durden Mon, 12/05/2022 - 15:53

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