Morningstar Magazine - October/November 2017 - 23

Dispatches

Global Briefs
Amazon Microsoft

Alphabet

Oracle IBM

Alibaba

Annual Capital Expenditure

Cumulative Capital Expenditure

25,000
MM

TRENDS

Capital
Commitments Speak Volumes About the Public Cloud Market
20,000
The two most established cloud vendors, Amazon.
footprint. It is no coincidence that they also
AMZN and Microsoft MSFT, have poured
com15,000
represent the market leaders by revenue share.
significant incremental capital into their businesses
over the past several years, with the overwhelming
We believe Alphabet GOOGL will commit
10,000of funds being funneled toward
a significant portion of the nearly $90 billion in
majority
cloud interests. We forecast that the firms will
capital expenditures we forecast over the
5,000
next five years toward its Google Cloud Platform.
spend
an incremental $110 billion combined
over the next five years to expand their data center
Alibaba BABA has dramatically increased
0
2002
2004
2006
2008
2010
2012
2014

160,000
MM

120,000
its capital investment over the past several years,
and it has a fairly clear path to cloud success
in China. Oracle ORCL and IBM IBM are also-rans.
80,000
(See Sector Rap on Page 82 for more on
cloud vendors.)
40,000

Rodney Nelson is an equity analyst with Morningstar
Research Services.

2016

2018

0

2020

Annual and Cumulative Capital Expenditure Levels

Annual Capital Expenditure

Cumulative Capital Expenditure

25,000
$MM

160,000
$MM

20,000

120,000

15,000
80,000
10,000
40,000

5,000
0

0
2002
Amazon

2021E 2002
Microsoft

2021E 2002
Alphabet

2021E 2002
Oracle

2021E 2002
IBM

Sources: Company filings, Morningstar.
Note: Alibaba spending starts in 2012, the first year of publicly available data.

Annual Capital Expenditure

2021E 2002
Alibaba

2021E

Cumulative Capital Expenditure

25,000
MM
20,000 Bond Fund Could
Your
Be15,000
Riskier Than It Looks
10,000

AMERICAS

United States
5,000
0 spreads narrowing and returns
With credit
2021Eso2002
across bond2002
sectors converging
far
Amazon
Microsoft
in 2017, it's a good time for bond fund
investors
to question whether they're getting paid
enough to take risk.

160,000
MM
The most commonly used metric for measuring
an investment's risk is the volatility of its
historical returns. Academics have developed
various measures that "risk-adjust" returns, such
as the Sharpe ratio and information ratio,
using volatility as a proxy for risk. Such metrics
attempt to gauge whether investors have
been adequately compensated for the risks taken.

experienced elevated defaults accompanied by
120,000
sharp sell-offs. Local-currency emerging-markets
bonds have traditionally experienced heightened
levels of volatility because of fluctuations in
80,000
emerging-markets currencies relative to the dollar.
Long-duration Treasuries, which are highly
sensitive to small changes in Treasury yields, have
40,000
been similarly volatile.

But how informative are volatility-based
But we don't necessarily need volatility to tell us 0
2021Eperformance
2002
2021E
2002
2021E
2002
2021Eare2002
metrics? During long
these sectors
risky. Looking at2021E
a fund's credit
Alphabet
Oracle
IBM
Alibaba
stretches, volatility can be useful in highlighting
quality (or other fundamental measures of default
certain types of risk. For example, in periods
risk), currency, and duration exposures would give
of economic weakness, high-yield bonds have
us the same information about those specific risks.

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Table of Contents for the Digital Edition of Morningstar Magazine - October/November 2017
