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Today's cloud-enabled small companies are tomorrow's market share takers

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The cloud is where computing power, software delivery, video and music streaming now resides. Where once we purchased Microsoft Office on a disc, today we access it through the cloud, paying for a subscription. The cloud has permanently transformed the unit economics of delivering software and technology.

Universal Music, Sony and Warner once had to burn an album onto a CD, package it in physical artwork and a plastic case and ship it around the world. Today they simply upload a song to the cloud. And because access is so ubiquitous more songs are purchased today than they ever could when delivered physically.

The revenue models and profitability of businesses than can leverage the cloud are beneficially altered. And the greatest potential benefits may just be conferred on Australian small companies because for many of those companies the change is most profound.

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You see, in the past, technology was a competitive weapon best leveraged by large established players that could afford the heavy upfront investment and maintenance costs required and high cost to maintain. Previously it was scale that made the economics of technology work.

Today that's no longer the case. Today technology is available as a service. There is often no upfront cost under the new user-pays model. In this new world scale becomes a burdensome, overhead-riddled disadvantage.

Today's cloud-enabled small companies are tomorrow's market share takers. If you haven't already guessed, at Montgomery we currently believe cloud will be a major catalyst that will see select stocks in our small company universe wrestle market share from sluggish or immobile big caps - those that are too big to change, but no longer too big to fail.

One company delivering the framework on which this innovation cycle is being built is Macquarie Telecom. Because of its exposure to a structural growth story, we believe it's both a defensive and an exciting growth stock irrespective of how COVID plays out.

All the data that we rely on today to run the digital economy has to live somewhere, and home is a data centre. Macquarie Telecom is a data centre operator, and its business is expanding in a big way

The company is developing a new datacentre in Sydney and it's going to be a meaningful driver of profit growth for many years to come. The new Sydney datacentre will increase the company's DC capacity, in stages, from 14MW today to 50MW. The first stage is scheduled to go live in January 2021, just four months away.

Stage one is an incremental 18NW, and to give you a sense of the significance

we estimate Stage one could deliver $40 million of EBITDA. To put that in perspective Macquarie Telecom generated EBITDA of $66 million last financial year. The second stage could deliver another $40 million of EBITDA.

What we are excited about, apart from the fact investors in The Montgomery Small Companies Fund benefit, is that the development of the company's revenue and profit opportunity and growth can be internally funded. According to our analysis there's no need for equity to fund the capex.

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Roger Montgomery is founder, chairman and chief investment officer of Montgomery Investment Management. Following a successful career as an analyst and public company chairman, Roger published the first edition of his stock market guide, Value.able, in 2010, becoming an Australian best seller in just 16 weeks. He holds a Bachelor of Commerce and is a senior fellow of the Financial Institute of Australasia.
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