It is true that the cloud business is consolidating. It is true that Microsoft, as well as Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), stand among the leaders in the business, while carriers and other players are left behind. I am second to none in my admiration for Satya Nadella's strategy. He saved the company.
But the argument that Microsoft is winning is tied to three things: the way numbers work, Microsoft's focus on the large company "enterprise" business, and the way Microsoft calculates cloud revenue.
First, it's easier to grow from a small base than a big one. If you have $100 million in revenue one year and $200 million the next year, you just doubled your revenue. If you have $1 billion in revenue one year and $1.6 billion the next year, you only grew 60%. But your growth year-over-year is much greater than the company that doubled its take.
Second, the "enterprise" business is not where the growth is in cloud. Big companies change, and grow, slowly. Enterprises of all sorts are having their lunch eaten by faster-moving cloud-first start-ups. In time, the enterprises may buy many of the start-ups, but you want to be on the selling side of that trade, and they're not going to switch many of the start-ups' cloud from Amazon to Microsoft because that would take time to no positive effect. Business moves too quickly. Needless to say, most cloud-first start-ups are still with Amazon.
Third, cloud consists of several markets - infrastructure, platforms, and services. Amazon has always led in infrastructure, the "operating system" of the market. Microsoft lumps service revenue into its cloud claims, the "applications" of cloud. It's certainly legitimate to do that, but it is comparing apples and oranges, and I prefer being at the base of the stack to the top. That's how Microsoft itself grew, in the 1990s, by controlling the operating system base.
Under Nadella, Microsoft is using cloud defensively, rebuilding the entire company on cloud, making itself cloud-dependent, and trying to bring its existing customer base along with it. It has been successful with that strategy so far. I own Microsoft stock, although there are days when I don't know why, as it's up less than 10% over the last year and remains, at heart, a yield play.
Amazon, by contrast, is using cloud offensively. It built its business on cloud a decade ago, and has aggressively used cash flow from other areas of the business to gain a position of dominance in global cloud infrastructure. The two sides of the business complement one another - commerce and media create demand for cloud growth, and cloud growth expands the market for commerce and media. Cloud may be the primary profit driver for Amazon but it is, in terms of total revenue, a side business.
This is why Amazon shares are up 67% over the last year, and why Amazon shares have tripled the performance of Microsoft's since Nadella became CEO. Microsoft's success in selling cloud applications to enterprises is just not worth as much as Amazon's dominance of the general cloud market.
Disclosure: I am/we are long MSFT, GOOGL, AMZN.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.