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3 WAYS TO PLAY COMPUTING THEME

OCTOBER 2017 Joshua Spencer Portfolio Manager, Global Technology Equity Strategy

The days when companies were forced to install servers and on site to meet their various computing needs are quickly coming to an end. The earlier technology, requiring expensive maintenance and routine upgrades has given way to , which offers a more customer-friendly solution—one that is disrupting the technology landscape. Cloud computing represents a significant investment theme for the T. Rowe Price Global Technology Equity Fund1, and companies like .com, salesforce.com, and Holding represent a few of the innovative companies in this space.

AMAZON WEB SERVICES (AWS) Amazon.com’s (AWS) is one of the biggest players in on-demand computing power. The company has upended the dynamics of storage through AWS, whose scalability has allowed companies to adjust to meet the amount of server capacity they require, effectively ending the days of idle capacity. AWS and similar cloud-based infrastructures and platforms help facilitate e-business, big data analytics, enterprise applications, and many other functions.

The shift to on-demand computing power is unmistakable, as it results in a significant reduction in a company’s investment in hardware and software, as well as subsequent cost savings on information technology (IT) staff. Indeed, a recent survey released in February 2017 of more than 2,000 IT professionals conducted by antivirus McAfee found that over 80% of businesses are now adhering to a “cloud first” strategy.

On-demand computing power allows firms to focus on their core competencies rather than diverting resources to maintain in-house technology. Firms recognise that cloud computing’s cost savings and increased efficiencies cannot be understated.

SALESFORCE.COM Other firms deliver applications and services via the cloud. For example, a retailer might want to use social media to resolve customer complaints. Several providers of enterprise software-as-a-service (SaaS) assist with strategically tracking and responding to customer posts. The company can subscribe to this service rather than paying for licensed software. This subscription-based model provides companies with flexibility and cuts internal IT costs.

Salesforce.com, owned by the Fund1, is a leading SaaS provider, with the majority of its revenue derived from customer relationship management applications. Salesforce’s strong front-office product portfolio and highly recurring subscription business model should help it become a beneficiary of the trend toward SaaS. We are mindful, however, that the company’s operating margins are lower than some of its peers.

1 T. Rowe Price Funds OEIC – Global Technology Equity Fund

ALIBABA A key advantage of investing across the globe is that we can apply what we learned in one market to another. Our position in Chinese stock Alibaba Group Holding, one of the largest e-commerce companies in the world, illustrates this.

Its cloud business, AliCloud, has scale and network effects that are reminiscent of a younger AWS. Unlike Amazon.com in 2006, Alibaba Group Holding will not need to pitch the benefits of cloud computing because these are now well known. Furthermore, the company operates in a market with reduced competitive headwinds. That being said, cloud computing adoption is in its early stages within the region, and unforeseen challenges may arise.

A POWERFUL TREND DRIVING INNOVATION Increased demand for products and services like streaming video services and augmented reality should in turn increase demand for cloud infrastructure and services. Furthermore, cloud computing models are well equipped to further innovate and provide solutions to existing and burgeoning industries. For example, autonomous vehicles generate approximately one gigabyte of data every second—an amount that would overwhelm current network bandwidth if many self-driving vehicles were operating in a given area. Innovations in cloud computing that allow data workloads to be processed closer to the source of the data will help spur growth for the industry.

In our view, cloud computing is a well-established trend with multiple years of growth ahead. Investing in cloud computing requires a deep understanding of the industry and how new innovations will leverage—and even change—this technology. We believe our bottom-up approach to stock selection coupled with our firm’s global capabilities assist us in understanding both.

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