The Cloud Beckons

Feb. 24, 2020 7:17 AM ETAMZN, GOOG, MSFT, GOOGL4 Comments4 Likes
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Summary

  • Cloud applications present a literal oasis of growth in the midst of endless trade tensions and political uncertainty that dampen growth potential worldwide.
  • Amazon, Microsoft, Google and Alibaba corner current markets for cloud products and services throughout the world.
  • The US market remains the dominant consumer of cloud services and products, with Asia and Europe in distant second and third rankings.
  • CAGR of global cloud services is about 22% through 2023 with corporate spending about double of total GDP output for the economy as a whole.

With equity investors starved of growth venues across large swaths of the market, cloud software applications present one of the most durable plays moving forward. Amazon (AMZN), Microsoft (MSFT) and Google (GOOG) here in the US and Alibaba (BABA) in China, have spent billions in the build-out of their respective cloud networks over the past five years. Alibaba (purple line) is largely a regional player in the Asia-Pacific public and hybrid cloud markets, places fourth in the global cloud competition at $5.2 billion in revenue or 4.9% of the global market through the end of last year. Google (orange line) reported cloud-based revenue of $8.918 billion, up just shy of 53% YOY, posting a whopping 120% growth in cloud revenues since 2017. The cloud now comprises 5.5% of the company’s total revenue. Microsoft (red line) reported earlier this month that its commercial cloud revenue for the quarter was up 39%, topping out at $12.5 billion for the period. Service products and cloud services were up 62% YOY on revenue posted by the company’s Azure platform. Market leader Amazon (green line) posted $35.026 billion in revenue from its AWS unit, up 37% YOY. AWS continues to be the dominant contributor to Amazon’s operating income, that hit $14.5 billion during the quarter. AWS contributed 63% of the total (see Figure 1, below).

Figure 1: Amazon, Microsoft and Google against the S&P 500

The digital economy in the US is estimated to account for about 6.9% or $1.4 trillion of current GDP through the end of 2017, up from about 5.9% in 1997. The real value added grew at an average annual rate of 9.9% from 1998 through 2017. The number dwarfs the growth of the greater economy of about 2.3% over the same period. Such annualized growth numbers lead market players such as Microsoft’s Satya Nadella to predict tech spending as a percentage of total global GDP will double over the next decade.

According to International Data Center data, public cloud spending (cloud services delivered via the internet), will grow at a CAGR of 22.3% to nearly $500 billion through the end of 2023. Geographically, the US will remain by far the largest cloud-based market at roughly 59% through the end of last year. Asia/Pacific is a distant second with about 19% of the market followed by Europe at 16%. Emerging markets comprise a 6% market share over the period. China projects out as the fastest growing market with an estimated CAGR of over 49%. The Chinese market will largely be serviced by Chinese companies, including Alibaba, Tencent, Sinnet and Baidu, which already own about 40% of their home market. Continuing US-Chinese trade tensions, despite the tentative trade agreement last month and China’s ongoing industrial policies, will likely keep western cloud providers on a short leash moving forward. Latin America will also see strong growth, albeit from a low starting point, with projected annualized growth levels in excess of 38% for the period.

Cloud usage over the period by enterprise size: Companies with more than 1,000 employees account for about 58% of cloud spending through the end of 2019. About 20% of companies with more than 100 but less than 1,000 employees place company workloads in cloud-based operations. Companies with less than 100 employees are 22% cloud-based. Larger companies (84%) maintain multiple cloud strategies, splitting their workloads among public or internet-based (9%), private (17%) and hybrid (58%) clouds, which are a combination of both private and public clouds. Small- and medium-sized enterprises (SME) are much more apt to use either single or multiple public clouds (44%). Only about 9% of all companies are spending for private cloud platforms. Enterprises of 10 employees or less will deliver low single digit growth in public cloud spending.

Cloud usage by industry: Unsurprisingly, tech service companies claim the biggest slice of the cloud pie with 30%, followed by software (17%), financial services (8%), telecommunications and business services (6%), education (5%), government (4%) and healthcare (3%).

Cloud spending is now a significant line item for IT budgets of US companies both large and small. More than 33% of enterprises have annual cloud spending budgets of $1.2 million or more with 22% spending $2.4 million or more through the end of last year. About 8% of companies are spending $12 million a year. The quarter-over-quarter corporate spending on intellectual property products since 2000 is 4.7%, double GDP output, consumer and government spending and more than the net value of imports and exports of the greater economy over the period.

Globally, AWS holds a 34.6% share, followed by Microsoft’s Azure at 16.9% and Google Cloud at 5.8% through the end of 2019. Ceteris paribus, total market share of existing cloud players will likely shrink as second-tier cloud players gain traction and new entrants attempt to grab a piece of this lucrative market play. The better measure of the breadth and scope of any individual player in the market is the age-old premise: Follow the money. Amazon’s total sales amount to roughly $34 billion through the end of last year. Microsoft’s Azure posted about $18 billion while Google’s cloud revenue amounts to roughly $6 billion for the period. Amazon, with about a seven-year head start in a cloud field it largely created, owns a commanding lead.

Much of the growth in the space will come from North America, about 38% through the end of 2023. Outside of the advanced economies, about 17% growth is projected for the period.

The message appears clear enough: Cloud revenue will drive tech stocks for the foreseeable future.

This article was written by

Douglas Adams profile picture
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Douglas Adams specializes in macro-economic research and turning theory into practical portfolio applications for clients over the past seventeen years. Mr. Adams recently formed Charybdis Investments International based in High Falls, New York where he is the managing director of a fee-only investment advisory practice with clients throughout the United States. As an author, Mr. Adams has commented widely on a diverse array of topics from Brexit to monetary policy to forex to labor productivity and wage growth. He holds an undergraduate degree from the University of California, a master’s degree from the University of Washington and an MBA in finance from Syracuse University.
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Disclosure: I am/we are long AMZN, GOOG, MSFT. 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.

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