I think this cloud computing stock will thrive in the next lockdown

Zaven Boyrazian breaks down a cloud computing stock that allows modern businesses and government agencies to maximise their efficiency.

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The demand for video conferencing solutions for both businesses and educators continues to grow as the nation enters a second Covid-19 lockdown, in various forms. Companies who operate on a cloud platform – like Zoom Video Communications – have greatly benefited from the increased demand, as have cloud computing stocks.

The sudden surge in user activity has drastically increased the need for datacentres and server farm capacity to maintain the increased traffic on their cloud platforms.

iomart Group (LSE:IOM) owns and operate datacentres around the world as well as a private fibre optic network. The firm’s infrastructure has allowed it to gain a reputation for secure, high-quality data services for businesses – both public and private.

It’s even attracted several UK government agencies to its network.

The cloud computing stock has a revenue stream deriving from two segments: Cloud Services and Easyspace.

The Cloud Services segment is the larger of the two and generated £99.8m revenue in 2020. It provides customers with a fully managed and bespoke cloud infrastructure as well as dedicated servers. Put simply, clients can integrate and run their platforms seamlessly through iomart without any disruptions while having 24/7 on-site support should a problem occur.

The Easyspace segment provides a range of products – such as domain names and email services – to the small & medium-sized enterprise (SME) market space.

Both the top and bottom line have been consistently increasing year-on-year (YoY).

£m

2020

2019

2018

2017

2016

Revenue

113

104

98

90

76

Operating Profit

19

17

16

16

15

Operating Margin (%)

16.81

16.35

16.33

17.78

19.74

While an average 10% YoY growth in revenue is certainly not ground-breaking, almost 90% of it has been generated from recurring sources. This has helped keep operational costs low, resulting in a handsome operating margin.

Despite this increased performance and ideal revenue source, the operating margin has somewhat declined since 2016.

However, the cause appears to be rooted from engaging in bolt-on acquisitions as the firm expands. Most recently, the successful integration of Bytemark and LDeX to its portfolio, adding new customers and complementary datacentre locations.

With the bulk of the revenue being generated from within the UK and online operations, the direct effects of Brexit remain negligible. Should the need for an EU trading relationship arise, iomart has an established subsidiary in the Republic of Ireland from where it can trade seamlessly.

There are some risks to be aware of. The cloud computing stock has managed to thwart competitors thanks to its high standing reputation for excellence. If this reputation were to be compromised by something such as a security breach, it would have devastating effects on the trust between the firm and its customers.

Furthermore, while the Cloud Services segment saw organic growth of 6% in 2020 – up from 2% in 2019 – the firm still relies heavily on acquisitive revenue growth.

To date, I believe the management team have proven capable in identifying acquisition targets to create value for shareholders. However, if that were to change, it could introduce several disruptions to the business.

2020 marks the twelfth consecutive year of growth for the cloud computing stock. With organic growth beginning to become the dominant driving force, I think investors can reap enormous long term gains as cloud-based innovations continue to thrive.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Zaven Boyrazian owns shares in Zoom Video Communications. The Motley Fool UK has recommended Iomart Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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