Back to top

Image: Bigstock

3 Players Fast Catching Up with Amazon in the Cloud Race

Read MoreHide Full Article

Given its scope and advantages (cost, scaling, convenience), it’s not surprising that the demand for cloud computing software and applications is on the rise. There is no doubt that cloud will continue to evolve over the next few years and the majority of companies will be transitioning to the cloud in one way or the other.

A company that’s currently dominating the space is Amazon.com, Inc. (AMZN - Free Report) with its Amazon Web Services (AWS). The unit, once formed to handle Amazon’s own storage needs, has quickly become a billion-dollar business and the cash cow for the company. Today AWS is the biggest driver of Amazon’s profitability, with margins significantly higher than retail.

AWS’s unmatched depth and breadth of products and services, simple but sophisticated user experience and continuous price cuts lead to steady customer wins, keeping it well ahead of rival services.

Its main advantage is that it gives the company a massive lead over others in the space. It began offering cloud infrastructure service long before its competitors started taking the business seriously. While they remained skeptical about the market’s growth prospects and refrained from investing, AWS gained a first mover advantage and has emerged as a leader in the last six to seven years.

Amazon.com, Inc. Price

Continuous huge investments in infrastructure development and service expansion are helping AWS maintain its leadership in the cloud computing space today. In the latest quarter, AWS revenues were up 11.8% sequentially and a massive 41.9% year over year to $4.6 billion. Operating margin was 25.5%.

Amazon carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Number Crunching

According to third-quarter data from Synergy Research Group, the cloud market is growing at a rate of more than 40% per year. Amazon, Microsoft and IBM are the first, second and third largest cloud providers, respectively.

Though Google, Microsoft and Alibaba have cloud revenue growth rates higher than that of Amazon, AWS remains bigger than its next five competitors combined.

The overall growth expectation for the public cloud computing services market is bullish. According to Gartner, the worldwide public cloud services market is projected to grow 18.5% in 2017 to $260.2 billion, up from $219.6 billion in 2016. This figure will increase to $411.4 billion by 2020.

Infrastructure-as-a-Service (IaaS) is projected to be the highest growth service driven by improvement in platform-as-a-service (PaaS) and massive adoption of artificial intelligence (AI), analytics and the Internet of Things (IoT). IaaS is projected to grow from $34.7 billion in 2016 to $72.4 billion in 2020. So, tech companies will increasingly race to this corner of the market before others enter the picture.

The Contest Has Just Begun

Microsoft’s (MSFT - Free Report) Azure and Office 365 are fast catching up with Amazon. Microsoft’s compute capacity in the cloud, along with its enterprise relationships is something to reckon with. Also, the company is a major provider of hybrid cloud services, a market expected to accelerate rapidly in the next few years.

Azure, that initially provided a platform-as-a-service (PaaS) layer, has been expanded to offer the lower level infrastructure services that actually make Amazon so popular. To further enhance it, Microsoft has been integrating Azure with Windows Server and its other enterprise products that are used by many of the company’s biggest customers.

Microsoft is also trying to increase Azure’s appeal to software developers through the Linux operating system. So, as cloud computing shifts from hardware to software going forward, Microsoft will have a chance to leapfrog Amazon, leveraging on its 42-year long engagement in software.

In the last reported quarter, Microsoft’s commercial cloud annualized revenue run rate reached $20.4 billion, achieving the company's goal set in fiscal 2015. Going ahead, it is difficult to overlook this company as far as enterprise software brands are considered. Microsoft currently carries a Zacks Rank #3.

Microsoft Corporation Price

The ability of Alphabet (GOOGL - Free Report) subsidiary Google’s cloud service to offer scalable and up-to-date technology is known to all.

Google’s cloud services are going from strength to strength and its Google Docs and Google Drive products are also gaining traction. Google’s Chromebook, which relies entirely on the Internet, is the company’s way of drawing more people to its cloud.

Importantly, Google isn't trying to compete with Amazon by offering just another AWS. Instead, it's working to provide Google Cloud developers access to its cutting-edge services like artificial intelligence and machine vision for a price.

Google’s still got a long way to go but it has a strong motivation to reach the mark The huge prospects in the cloud, growing competition in the advertising business and the financial means to make it happen are working in its favor.

In the last reported quarter, Google’s other revenues were up a massive 40% year over year, driven by Cloud, Play and Hardware. Alphabet carries a Zacks Rank #3.

Alphabet Inc. Price

International Business Machines (IBM - Free Report) has found yet another way of competing with Amazon. Apart from offering Watson, its ground-breaking artificial intelligence service through its cloud and investing heavily in IBM Bluemix, the company is offering consulting services focused on installing and integrating cloud applications.

Despite lagging behind its peers, IBM is developing a niche for its hybrid cloud services, along with “Strategic Imperatives” like cognitive computing, artificial intelligence, and machine learning. With Watson, IBM is advancing in vital areas like Internet of Things, healthcare, and financial services end-markets that will support growth in the long run.

IBM has the potential to gain traction and reign supreme over Amazon and other cloud competitors once its hybrid approach starts finding takers in the public and private cloud markets.

In the latest quarter, IBM’s cloud revenues surged 20% from the year-ago quarter. The annual run rate for cloud as-a-service revenue increased 24% at constant currency on a year-over-year basis to $9.4 billion. IBM carries a Zacks Rank #3.

International Business Machines Corporation Price

Wrapping Up

It seems that the biggest winner will most probably be Amazon, given its massive customer base and considerable presence in the space. Microsoft is likely to be a close second. Services from Alphabet and IBM are likely to grow but not as quickly as Amazon’s.

There might be others that will change the face of the cloud in the future but for now, this mix seems to be it.

Wall Street’s Next Amazon

Zacks EVP Kevin Matras believes this familiar stock has only just begun its climb to become one of the greatest investments of all time. It’s a once-in-a-generation opportunity to invest in pure genius.

Click for details >>

Published in