The cloud war: opportunities at Amazon, Google, Microsoft?

The superior growth rates of the three tech giants, which reach 35-50% per year, continue to be a major differentiator.

This year’s tech jolt may offer substantial opportunities for investing in cloud computing infrastructure giants, which are enjoying exceptional growth fueled by rapid cloud adoption and strong balance sheets. Recent earnings reports and current valuations suggest a bullish outlook.

Cloud infrastructure consists of all the hardware and software components needed to support the delivery of cloud services to customers. It is flexible and scalable, making it ideal for enterprise computing. It offers an attractive return on investment thanks to reduced infrastructure and storage costs, its flexibility, its scalability and its security measures to counter cyberattacks.

It accounts for nearly 50% of all data stored worldwide. And as data takes center stage in secular trends of the future, such as AI and automation, and real-time analytics for industrial, healthcare, or consumer purposes, cloud infrastructure is essential for hosting and processing data.

The cloud infrastructure giants have built well-established cloud businesses that together generated $178 billion in revenue in 2021. The secular “sticky” trend in cloud adoption continues to fuel growth, potentially providing opportunities for unique investment. Synergy Research Group data shows enterprise spending on cloud infrastructure services grew 34% in the first quarter, year-on-year, the eleventh time in twelve quarters that growth in year-over-year is in the range of 34 to 40%.

Who are the major cloud infrastructure players?

Amazon (AWS) leads with 33% market share, followed by Microsoft Cloud with 22%, and Google Cloud with 10%, together accounting for 65% of the market.

Amazon Web Services: In the first quarter, the giant grew faster than the rest of the market for the third consecutive quarter. Its market share remains stable.

Microsoft Cloud: Has grown its market share at a rate of approximately 2% per year.

GoogleCloud: Has grown its market share at a rate of approximately 1% per year.

Source: Synergy Research Group.

The superior growth rates of the three tech giants, which reach 35-50% per year, continue to be a major differentiator, allowing them to increase their market share. The other players continued to increase their revenues, but at a slower growth rate, around 10-20%.

Overview of first quarter results

AWS revealed strong customer momentum in the first quarter, with cloud adoption across many important industries. It won new customers such as T-Systems, Verizon Connect, Telefonica and Boeing, and announced new partnerships with the MongoDB database platform, among others.

In the first quarter, AWS grew 37% year over year, with revenue of $18.4 billion. Operating income amounted to 6.5 billion USD, up 57% over one year.

The turnover of Microsoft Cloud grew 32% to $23.4 billion, driven by Azure and other cloud services which grew 46%, driven by growth in consumption-based services. Operating profit increased by 29%. The company highlighted strong customer commitment to the cloud platform and robust sales execution in commercial reservations.

The turnover of Google Cloud grew 44% to $5.8 billion in the first quarter, year over year. The Google Cloud segment includes i. Google Cloud Platform (GCP) which includes infrastructure, platform and other services, as well as ii. Google Workplace, and iii. other business services. In March, it reached an agreement to acquire Mandiant, a cyber defense leader, in a deal valued at $5.4 billion.

Growth was driven by GCP, boosted by infrastructure and platform services. Quarterly operating loss decreased by $43 million to $931 million, due to higher expenses.

While cloud growth is dramatic, the recurring loss and small size of the cloud business relative to all of Alphabet’s other businesses makes it difficult to justify an investment in Alphabet based on cloud potential alone.

Macroeconomic headwinds, including rising costs and in particular wages, exchange rate headwinds and rising borrowing costs, could hurt growth in the coming quarters. That remains to be seen, but a slowdown in cloud growth could also provide opportunities for the Big 3.

Salesforce results revealed a positive image for the cloud, mentioning that there was not a “significant impact”. Similarly, Oracle Corp’s earnings this week revealed that its cloud infrastructure business has entered a “hypergrowth phase” that could see the company record “exceptional revenue growth over the next next quarters.

The second quarter results, in late July and early August, should provide more clues about the state of demand for cloud infrastructure.

Compelling reviews

At the March 2020 low, cloud giants were offering “can’t miss” opportunities. In the current environment, resilient earnings point to a solid outlook, even if growth slows.

But how much have valuations fallen?

It may be too early to tell, as it will depend on the potential future earnings revision, but overall valuation multiples have compressed significantly. For Amazon, the data is influenced by the one-time loss on the stake in Rivian in the last quarter.

Uncertainty remains about the non-cloud businesses of these giants, which could be further impacted by the slowing economy and shrinking budgets. On the bright side, the stock market downturn can also accelerate mergers and acquisitions, such as the recent acquisition of VMware, a multi-cloud service for all applications, by Broadcom for $61 billion in cash.

In conclusion

The strong growth trend of the cloud, combined with a significant market correction, compressed the valuation multiples. The three cloud giants have managed to grab most of the cloud infrastructure market share and boast huge balanced balance sheets. The tougher economic situation could provide them with an added advantage to grab market share or grab competitors to shore up their cloud business.

Leave a Comment