It was November 1985…

Bill Gates had just put the final lines of code into the first version of the Windows operating system. 

Built on the ugly and geeky old system of MS-DOS, Windows quickly evolved. 

Even still, at the time you would have been crazy to forecast that by the time Windows 3.1 was released in 1992, it would sell 3,000,000 copies in the first two months. 

Microsoft’s (NASDAQ: MSFT) phenomenal growth made it an unprecedented time for the technology industry, for consumers, and for Bill Gates. 

As we all know, Gates’ personal fortune vaulted higher and it wasn’t long before he was the world’s richest person. As they say, the rest is history. 

It’s now 2020…

If I told you how to connect to your work computer from home you would probably yawn and look away. 

People have been connecting to ‘remote desktops’ since last millennium. Using one computer (like the one you’re using to read this report) and connecting it to another for extra power, storage, or — even — more security, is commonplace. 

However, despite building this functionality into its software decades ago, not even Microsoft was prepared for what happened in 2009…

In 2009, Google — now called Alphabet Inc (NASDAQ: GOOGL) — began testing the first version of Google Docs. It was Microsoft Word, but fully online. Accessible anywhere, on any device with a decent web browser. 

It’s funny. Google Docs is what I’m using to write this report. 

In fact, Google Docs is what the entire Rask Australia team has used since day one to work together remotely on research and collaborate on different types of projects. 

Google Docs is part of a suite of cloud-first products called Google Drive. 

Google launched its Drive Suite a few years after Docs, in 2012. But here’s the crazy part…

According to The Verge, it took just 6 years for Google Drive to reach 1,000,000,000 (billion) users. At the same time, Google Drive was already storing 2 trillion different files (put an extra three zeros on the last number, then multiply it by 2 — that’s 2 trillion).  

Needless to say, Google Drive, faster internet speeds and beautifully designed web products strapped a rocket under the stock prices of the world’s biggest companies. 

The stock prices of even the mightiest companies — Microsoft, Amazon, Apple and Oracle — have rocketed higher after discovering their most valuable service to businesses and consumers could be something new entirely…

The Cloud Computing Revolution

The cloud computing revolution includes far more than sharing documents, getting extra file storage or collaborating on spreadsheets — although those are very handy tools!

The global cloud computing market has — and will continue to — revolutionise the way you and I live and do business. Everything from surfing a faster version of the web, paying for products, communicating with colleagues, streaming our favourite content and getting tracked for advertising is ushering in a new world of investment opportunity.

Just how big of a deal is this?

Around the world, it’s estimated businesses and consumers spend around $3.7 trillion on IT. But consider:

1. The use of technology is exploding. Thanks to globalisation, every year tens of millions of people are using the internet for the first time to make a video call or purchase a product for delivery. 
2. Developing nations are “leapfrogging” existing tools like desktop computers and broadband in favour of phones and tablets — devices which rely heavily on the internet and cloud computing to function at their best.
3. The estimated yearly revenue collected by just three cloud technology firms — Google, Amazon and Microsoft — stood at more than $US100 billion (around $150 billion AUD, give or take) in 2020.
4. Finally, people are rapidly increasing the amount of internet they use. Every single time you visit a website, chances are that website has been — or is being — redeveloped for a cloud environment. 

Going back to 2016, Kenneth Research valued the entire cloud computing market at approximately $US210 billion. Conservative forecasters suggest it could grow at 29% per year until 2025. If you ask me, it would seem clear this HUGE market is only going to get bigger.

Like desktop PCs in the 90s. 

Like the internet after that. 

And mobile after that. 

The cloud revolution has already begun… sure. 

But I think it’s only just getting started. 

“Invest with the wind at your back”

When I speak with some of Australia’s leading investors on The Australian Investors Podcast, I ask them for their simple, ‘give it to me straight’ investing advice. 

When I asked Hamish Douglass, undoubtedly one of Australia’s most respected global investors, he told me to buy high quality companies and invest with the wind at your back. His advice is incredibly powerful (yet because it is such simple advice, it’s often completely overlooked by most investors). 

Here’s why I think investing this way is so important: 

Investing in companies which are increasing market share when the market for the product or service is also growing quickly could mean exponential growth for your company’s top line. 

Imagine where Windows would be without the semiconductor or computer processor. 

Imagine where Google Search would be without the internet. 

Imagine where the iPhone would be without 4G wireless.

The next piece of great long-term investment advice was handed to me by Lakehouse Capital’s Joe Magyer. He reminded me to focus my attention on companies with the highest rates of customer loyalty/retention, scalability and low fixed costs. 

It made me stop and think:

What’s not to like about buying shares in companies which produce the best of breed products, at low costs, with extreme customer loyalty and exponential growth potential?

Compare the company which loses 30% of customers each year with the company that loses just 5% but can charge existing customers 10% more for the same service. 

That’s the holy grail for me. 

Why? 

I believe that if an investor can find enough of these companies, he or she will have the ultimate recipe for potentially unimaginable gains over the long run (10-20 years).

It’s exactly these factors I look for when I release my #1 share ideas to members of my Rask Invest stock research service. 

(spoiler alert: all three of the companies I’ve identified for the cloud revolution I first recommended inside Rask Invest.)

With those principles in mind, here are three companies I’ve identified to take advantage of the cloud computing revolution as it sweeps over the world. 

#1 Alphabet Inc (NASDAQ: GOOGL)

Alphabet (Google) is still the most advanced company on the planet for internet search and digital advertising. Global Digital Advertising has been estimated to grow at 18% per year and hit $US350 billion in value by the mid-2020s. But that’s just one part of this beast of a company.

Amongst its many ‘other bets’, Alphabet has the number-three cloud platform (GCP) and more than one billion users on its Google suite of products (with only a fraction of that paying for the service, so far). 

If that wasn’t enough, Alphabet also owns arguably the world’s leading self-driving vehicle software (Waymo) and the world’s most powerful video advertising network (YouTube). Finally, with the Nest range of products — devices which ‘talk’ to the cloud via the ‘internet of things’ — Google is also one of the three major players in home automation.

With bugger-all debt on its balance sheet and over $US100 billion of cash assets, Alphabet’s biggest problem isn’t growth. It isn’t profits. Or finding opportunities. 

Alphabet’s biggest problem is trying to fly under-the-radar of regulators long enough to stay part of the trillion-dollar club. That is, companies which are worth more than $US1 trillion in market capitalisation. 

With bucket loads of optionality and market dominance, in my book, Alphabet is still the most flexible and exciting company for the cloud revolution. 

#2 Xero Limited (ASX: XRO)

Switching gears — and continents — to come back closer to home, we find Xero. In the mid-2000s, Xero was a start-up on a mission: make beautiful accounting software. 

Rod Drury, the Founder of Xero, saw the raw and untapped potential of the cloud long before almost every other person in New Zealand and Australia thought it was possible. Xero was built for the cloud from day one — a major advantage. 

Indeed, as we now know, being ‘cloud first’ is the key to unlocking near-unbelievable growth in customer/user numbers and revenue. 

Keep in mind, Xero was launched before the biggest wave of cloud adoption, it took the company only 10 years to get to its first 1 million accounting software users. And how long did it take them to add the next million? Just 2.5 years.

As of 2020, Xero has 2 million users, which, to be clear, have been acquired in the presence of intense competition from competitors such as MYOB, Reckon, Sage, QuickBooks and more.

A hugely underappreciated reason why Xero has grown so fast is that it keeps over 80% of its customer’s revenue. Meaning, it’s likely that more than 80 of the 100 customers Xero adds to its platform today will pay more for its products next year. Even better than that, Xero’s accounting software is often recommended by accountants who save time and money on their billing — but typically pass on an extra fee to their clients for making the recommendation. It’s a win, win, win.  

So is it any wonder why Morningstar data tells me this hyper-sticky software company was able to compound revenue at 40% during the three years to March 2019? I don’t think so. 

#3 Altium Limited (ASX: ALU)

Altium is an Australian engineering software business which — like Microsoft Windows — came to market in 1985. Fast forward to today and Altium has overseas offices in places like San Diego, New York, Munich and Shanghai. 

Altium software focuses on electronic design systems for 3D printed circuit boards (PCBs) and embedded system development. That’s a mouthful. 

Just think about it like this: engineers use Altium software to create the chips that could, for example, let a “smart” fridge in your kitchen “talk” to an Amazon server thousands of kilometres away and ask it to organise the delivery of your coffee beans. 

Altium’s products and platforms include Altium Designer, Altium Vault, CircuitStudio, CircuitMaker, TASKING and Octopart. Basically, Altium software is increasingly used by engineers and manufacturing firms to design, create and (more recently) source parts/components.

One thing I’m really looking forward to is seeing the ongoing growth of Altium 365, the company’s new cloud-based product which only launched in 2019. 

While Altium’s success has been no secret for Australian technology investors, I believe that those focused on the ultra-long-term potential (10-20 years) might be as excited by this high-risk, high-growth software company as I am. 

So is it time to buy, hold or sell?

For me, getting my investment portfolio exposed to the cloud computing revolution/’megatrend’ is an absolute no brainer. 

That said, investing for the long-term in rapid-pace cloud computing stocks is not for everyone. I think this trend has the potential to be extremely rewarding, sure. But I’m also anticipating a very bumpy ride, much like Microsoft in the 2000s. Few people remember this but it took some Microsoft shareholders more than 10 years to see a profit on their shares! It pays to be both patient and buy these companies at reasonable prices. 

Given the sharp risk-reward trade-off with these types of opportunities, my approach and philosophy to finding seemingly great investment opportunities is the same: 

For every 10 stocks I buy, I expect to lose money on 5 and maybe 3 of them just ‘make money’. However, 1 in 10 might double and the final one — the “multibagger” — might be a huge winner and outweigh all of the losers. But only if I hold it for the long run. 

Knowing that I could lose on 50% of the companies I buy might sound crazy, but I reckon the math checks out. 

For example, in 2018 I recommended a company called Pro Medicus (ASX: PME) to Rask Invest members. I picked PME when its share price was around $7.50. But it was only a few years before that (March, 2015) when the Pro Medicus share price was trading below $1.50. 

When you’re done reading my report, go ahead and check the company’s share price. That’s your ticket to dream…

The thing is, it’s estimated anywhere between 1% and 4% of stocks on the market account for all of the wealth creation. 

But if you’re searching in the right places (i.e. where megatrends like cloud computing join with sticky products and entrepreneurial founders) I’d like to think it’s possible for 1 in every 10 or 20 shares I buy to go on and become multibaggers that completely change the outlook of an ordinary share portfolio. 

Some shrewd investors call these growth companies “Gorillas”. 

Others will call them “monsters”.

Peter Lynch called them “multibaggers”.

I don’t have a name for them. I’m just happy to acknowledge that their wealth creation potential is truly amazing. That’s why I’m on the hunt for them each day for Rask Invest… 

Ok, so the next logical question to ask is: 

If we know:

1. A small number of stocks account for almost all of the best gains from the market,
2. There are massive, potentially-life changing, megatrends and revolutions underway right now, and
3. There are seemingly obvious ‘tells’ for identifying these companies early…

Why doesn’t everyone do it? 

Having studied investing for years, I believe there are a few reasons more people don’t invest this way: 

1. It’s scary. Investors need nerves of steel to ride out most market crashes. While most investors think they’re willing to take the risk of buying growth stocks, they’ll jump at the first sign of a 20% or 30% stock price fall. 
2. It’s a long-term thing. Sadly, I believe 90% of the readers who access this report are looking for get-rich-quick schemes, are prepared to invest in only one or two stocks, or choose to “invest” the same way they play billiards: a few beers in, point and shoot. If you ask me, it’s far more powerful to find one company which is likely to compound at 15% for 20 years than it is to find 5 companies which ‘could’ jump 50% in one year. 
3. It’s harder than it looks. Anyone can take a shotgun approach to investing and pluck 5 ideas from the newspaper. However, the way we tilt the odds of investing success in our favour is by having a solid investment process for sourcing ideas, filtering the chalk from the cheese, analysing management and assessing industry demand. In my Value Investor Program it takes me 10 hours just to explain the psychology, tools and processes of how we find and research companies for Rask Invest. And that was the short version! 

These are just some of the real reasons why I think 99% of investors get the stock market completely wrong. And it’s also why I believe so many Australian and Kiwi investors have taken me up on my offer to join Rask Invest and get access to my share research and exclusive member material (reports, podcasts, invites to events, videos, etc.).