The growth of cloud-based services and the death of the PC are two of the most important game-changing technology events of the current decade. They have completely changed the fortunes of many companies such as Amazon (AMZN, Financial), Microsoft (MSFT, Financial), IBM (IBM, Financial), Oracle (ORCL, Financial), Intel (INTC, Financial), Salesforce (CRM, Financial) and many more.
The proliferation of cloud in its many forms - infrastructure, software, platform, analytics, business process and so on - is by far the more impactful of the two. Let’s take a look at how some of the top technology companies are changing from within in order to keep up with the evolving tech landscape.
Here are just a few examples:
- Oracle is steadily moving away from being a seller of software and hardware that helps companies manage their infrastructure, to becoming a software and platform-as-a-service provider.
- IBM has been going through a painful revenue restructuring process as it adds more and more products in the as-a-service segment.
- The bottomline profitability of Amazon Web Services and the growth of this segment has taken a lot weight off Amazon’s shoulders, allowing the company to keep expanding itself around the world.
- Cloud is the single most important factor that is keeping Microsoft away from the pain of losing revenues from the slowdown in Windows sales.
All of these companies are aggressively pursuing cloud for their growth, so let's take a closer look at the numbers to understand who is ahead and who is behind and whether they’re really in competition with each other or if they’re each creating specific vertical markets within cloud which they will dominate in the future.
Amazon and Microsoft are both vying for the number one position in the cloud industry overall. These two companies have created a significant lead over others in the infrastructure-as-a-service (IaaS) segment. Microsoft’s Azure has been growing at three-digit speeds for the past few quarters, while Amazon Web Services revenue has been growing in the above-50% range since last year.
Microsoft’s cloud run rate - the annual revenue calculated by multiplying latest quarterly sales number by four - has reached $12.1 billion during the fourth quarter of this year, a 51% growth from the $8 billion run rate the company had at the end of last year. The growth rate puts them in second place after AWS, which grew sales by 63.86% during the most recent quarter.
Amazon’s growth is amazing, but Microsoft has plenty of ammunition that can help them close the gap due to the rapid growth of their productivity suite, especially Office 365. This Software-as-a-Service (SaaS) product has already zoomed past Google, Box and Salesforce to become the world’s most popular cloud-served software application.
You can already see the two different routes these companies are taking - one a pure-play cloud infrastructure company and the other a strong SaaS player.
IBM
IBM has been steadily improving its position in the cloud market by focusing heavily on the hybrid cloud side of things. That’s essentially a midway solution between on-premises IT infrastructure and a public cloud model and it is one that a lot of enterprise customers with huge existing infrastructure prefer.
But the real king in IBM’s portfolio is the analytics offerings it has built around Watson. With nearly $4.9 billion in revenues during the most recent quarter, in my opinion, analytics - or, more specifically, analytics-as-a-service - is the product leading IBM’s cloud charge.
The $4.9 billion reported for analytics during the second quarter of 2016 represents a 4% year over year growth. In the first quarter, analytics grew 9% to reach $4.2 billion in quarterly revenues. With almost five billion in revenues per quarter, analytics alone enjoys a run rate of nearly $20 billion in annual revenues for IBM and it is still growing. Total cloud revenue is $3.4 billion, placing their overall numbers a little bit higher than Microsoft’s annual run rate. The most important number of note here is IBM’s total cloud sales growth of 30% quarter-over-quarter.
Salesforce vs. Oracle
The other developing story in the cloud battle is the one that pits CRM leader Salesforce against Oracle’s increasingly ambitious plan to hit ten billion dollars in sales annually from Software-as-a-Service and Platform as-a-Service products. For Oracle this segment has been growing steadily since last year, and the company’s recent buyout of NetSuite - the world’s number one cloud-based ERP service provider - is a clear indication that the database king wants to accelerate in this area. Though both companies are divergent in their focus areas for the future, in the not-too-distant future a head-on collision is a definite possibility because of Oracle’s HCM (Human Capital Management) overlap with Salesforce’s CRM business.
Google is the dark horse in the cloud race. The company is yet to break out its cloud revenue numbers and it possibly won't do that until that gets to the level of a respectable money earner. For now, the company still lags the leaders in terms of datacenter footprint and may need a few more years to close that gap.
Artificial Intelligence (AI) is their core future strength and by this time next year, we should have a clear idea of where Google is with respect to that industry. If Google is able to close the gap with Amazon and Microsoft, they have a fighting chance in the cloud market.
To Each His Own
So far, we’ve seen the kind of niche that each of these players is carving within the cloud industry. Each of these niches will account for tens of billions in revenues for most of them before the decade is out and these companies will be the frontrunners.
Lets summarize each of their strengths to see which segment they will dominate:
- Amazon - Infrastructure-as-a-Service
- Microsoft - Enterprise productivity tools
- IBM - Analytics and hybrid cloud
- Google - Artificial Intelligence
- Oracle - Enterprise Resource Planning and Human Capital Management (both served on the cloud)
- Salesforce - Customer Relationship Management and Sales Process Management
As an investor in these companies, you will want to track the numbers around these segments: quarter-over-quarter and year-over-year growth rates, contribution to overall revenue, innovations within the niche, key client acquisitions, the disruptive impact of competitors and, most importantly, consistency of growth.
Disclosure: I have no positions in any of the stocks mentioned above and no intention to initiate a position in the next 72 hours.
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