We are beginning to hear more and more about the cloud and cloud computing but what is this exactly?  Cloud computing is the process of accessing data that is stored in an off-site location through high speed internet.  A lot of this data is stored in high-tech buildings called data centres, which have sophisticated security and air conditioning systems required to protect and cool the data storage infrastructure.  The change from storing data in-house to storing it off-site (in the cloud) is creating many opportunities for technology companies.

The rise in cloud computing has largely been driven by the roll out of high speed broadband fibre networks in developed nations.  The old copper networks were not capable of delivering large amounts of data at practical speeds, but the new and faster fibre networks have changed this reality.  For many businesses and website operators it is now practical and beneficial to outsource their data storage requirements to data centres rather than invest in their infrastructure.  NextDC is an Australian listed stock that saw this opportunity a few years ago and is in the process of building five data centres in each of Australia’s largest cities.  Their first centre in Brisbane was completed in October last year and is experiencing very strong demand.

As businesses outsource their data storage they become completely reliant on having an internet connection through the fibre connecting their building.  If the fibre network has an issue that cuts the connection the business is stranded without access to emails and other essential operating systems.  This has created an opportunity for ASX listed Big Air Ltd to provide wireless broadband through a network of rooftop dishes as a back-up connection.  Big Air is growing rapidly as more businesses use their network as a secondary connection.

Another benefit of high-speed internet is the ability to quickly download high definition movies and television shows.  We have seen our television providers begin to offer on-demand tv through the internet and recently ASX listed Quickflix entered the NZ market selling movies and television shows streamed through the internet.  Quickflix, which also operates in Australia, has grown its subscribers from 50,000 two years ago to over 120,000 today.

Xero, which is one of the NZX’s best performing stocks this year, offers cloud based accounting software for small to medium sized businesses.  Xero’s software allows users to access the accounting software from off-site locations and also has a mobile phone app.  It also allows external accountants to access a client’s accounting system from their own offices.   Xero has grown its customer numbers from 36,000 a year ago to 78,000 currently.

While technology stocks in fast growing “hot” industries can provide great returns, they can also generate spectacular losses as many investors found out in the dotcom bust early last decade.  Having the appropriate position size and reasonable diversification is essential when constructing a portfolio that includes high growth technology stocks.

William Curtayne

Disclosure:  Milford Funds own shares in NextDC, Xero and Big Air.