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Allianz Technology’s heads in the cloud as shares rebound

8 March 2019

Cloud computing stocks still have room for growth, says Allianz Technology fund manager Walter Price after the trust recovers from its mauling at the end of last year.

Cloud computing still accounts for a relatively small proportion of global technology revenues, suggesting there is much more growth to come for the sector as companies outsource their IT operations to the internet, says Allianz Technology (ATT) fund manager Walter Price.

Total revenues from cloud computing companies, software-as-service, enterprise infrastructure technology companies, as well as around 100 private companies in the sector, added up to less than $100 billion (£76.3 billion), he said.

Meanwhile global total expenditure on information technology amounted to around $3.4 trillion, added Richard Holway, a chairman of TechMarketView who is a non-executive director on the board of the £494 million technology trust.

‘So you can see why we think we're just getting started,’ said Price.

Price, who is based in San Francisco, spoke to journalists on a visit to the UK this week as the trust rebounds from a mauling at the end of last year. In common with other technology and growth stocks, its shares plunged nearly 22% in the fourth quarter as investors turned bearish on the global economy, but have regained 19% so far this year.

The Allianz Global Investors (AGI) manager explained that wealth creation in the sector over the past 11 years – since the launch of Facebook in the UK and the iPhone – had come from consumer technology.

Over the next decade, he expected this growth to shift into the enterprise and software-as-service technology space. ‘People have been talking about cloud computing for a while but it's remarkable how small the business still is for all the discussion over the last five or six years,’ he said.

Grass roots research by the fund manager found that some businesses had computer servers running at just 20% capacity, underlining the cost savings of switching to exteranl data storage providers on the 'cloud'. 

‘I think we're still early days in terms of cloud computing and its effect, a second order effect of faster innovation and better productivity for a lot of customers and a lot of companies’ said Price.

Salesforce (CRM.N), a 3% position in the trust, was one example of a promising cloud software company, said Price. ATT was an early investor in the business, when it was growing at between 30% and 40% a year. This growth was predicted to shrink to around 5% according to projections five years ago, but in fact had moderated to 20% a year, impressive for a group with annual turnover of $10 billion compared to its earlier $500 million.

‘And I think customers are using them for more - they went from sales to service to platform to analytics and now industry specific applications,’ he said.

Salesforce shares dipped earlier this week after it forecast current-quarter revenue and profit to be below analyst estimates, with reports linking this shortfall to increased competition from Microsoft (MSFT.O) and Oracle (ORCL.N).

It expected first-quarter profit to be between 60 and 61 cents per share, while revenue was forecast at between $3.67 billion and $3.68 billion. Analysts foresaw a profit of 63 cents a share and revenue of $3.7 billion.

However, Price said: ‘Our view is that the company was just being conservative in their forecasts for the next year given some uncertainty in the global economy. 

‘Results were good even after adjusting for special items (capital gains on investments), and that loss of share to Oracle and Microsoft are not much of an issue.’

Square (SQ.N), the payments processor which accounts for 3.3% of ATT, also fell on weak first quarter earnings guidance last week. It expected to produce earnings per share of 6 and 8 cents, below analyst estimates of 11 cents.

Mike Seidenberg, a co-manager with Price on the trust, was optimistic: ‘We were pleased seeing them outperform on the software/subscription line (+112%) as we feel this is one of the keys to their building a bigger moat around their customers.’

The fund managers used the sell-off to raise their weighting to 3.3% from 2.7% in Twilio (TWLO.N), a cloud-based platform that enables developers to build, scale, and operate real-time communications within software applications as a pay-as-you-go service.

‘We think there's a shortage of developers and anything you can do to make the developers' life easier is something that is being embraced by companies,’ said Price.  

At yesterday's closing price of £14.50, ATT shares stood close to 'par' or net asset value, having recovered from an 8.5% discount below NAV at the end of December. The shares advanced just 4% last year but their long-term record since the financial crisis is strong with a 10-year total shareholder return of 757%.

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