Cloud computing is critical to the future of tech, and investing in well-positioned cloud stocks in the rapidly advancing space will boost your portfolio’s long-term potential.
The global pandemic has illuminated the value of cloud computing. With the world working from home, businesses relying on this technology more than ever.
Cloud technology was a $227.8 billion market in 2019 and is anticipated to grow by a compounded annual growth rate (CAGR) of 16% over the next 3 years, according to Gartner’s research, which can be summarized in the table below.
It can be confusing to understand the different types of cloud computing and what they provide to users. Below is a graphic provided by bmc blogs illustrating the differences between IaaS, PaaS, SaaS, and on-premise servers.
My previous article, 3 SaaS Stocks For Your Portfolio of The Future, profiles 3 stock software as a service (SaaS) cloud picks that are well-positioned for the post-pandemic world. In this article, I will dissect the infrastructure as a service category and my 3 favorite IaaS stocks.
Infrastructure as a Service (IaaS)
IaaS is the fastest-growing cloud category, with a 22.5% CAGR expected over the next 3 years. This is one of the most exciting cloud spaces to be in with its seemingly endless capabilities and potential as AI & machine learning become a focal point for competitive edges.
IaaS is allowing companies to put their internal infrastructure, which is typically seen as an on-premise server room, in the cloud. Many enterprises are recognizing the benefit of IaaS, which provides them with a more proficient, less costly, and more flexible infrastructure.
This segment is rapidly saturating, but there is plenty of opportunity for the biggest and most adept players. This technology requires hyperscale computing with massive data centers and diverse capabilities. Considering the size necessary to compete in this field my IaaS picks are cutting-edge blue-chip names: Microsoft (MSFT - Free Report) , Amazon (AMZN - Free Report) , and Alibaba (BABA - Free Report)
Microsoft (MSFT - Free Report)
MSFT has become the largest publicly-traded company (by market cap) because of its enormously successful transition to the cloud. MSFT has dominated the operating system (OS) market for decades and is now a trailblazer in the cloud space.
Azure is Microsoft's IaaS play, and it has taken off in recent years. Amazon's AWS controls the space as an early mover on cloud computing, but Microsoft's Azure is slowly but surely taking market share. Azure is in an early stage of development compared to AWS, but it is being offered at a fraction of the price. It is growing at the double the rate, and analysts are calling it best-in-class.
Microsoft has the cash and scalability to take control of the cloud market if it is able to execute on consumer needs effectively. With a management team that continues to impress and stay ahead of the innovative curve, I see Microsoft's cloud dominance sustaining.
Microsoft Azure won a $10 billion Joint Enterprise Defense Infrastructure (JEDI) contract in October of 2019. A crucial 10-year government contract with the pentagon that locks in some substantial revenue. This contract not only gave Azure bragging rights, but it reinforced the attractiveness of Azure for potential customers.
MSFT is releasing its March quarter earnings after the bell Wednesday, April 29th. According to Zacks consensus estimates, analysts are expecting an EPS of $1.27 on sales of $33.86 billion, representing year-over-year growth of 11.4% and 10.7%, respectively.
MSFT shares have appreciated following the company's prior 10 earnings reports, as the tech powerhouse continues to outperform its already lofty expectations.
Amazon (AMZN - Free Report)
Amazon is best known for its e-commerce platform, but what is really driving the enterprise's bottom line is AWS, its cloud computing segment. AWS was an early mover in the IaaS space (having started in the early 2000s) and paved the way for many of its current competitors.
AWS has increased its sales by a CAGR of 42% since 2017 and its profitability has grown even more. AWS is now the primary growth driver for Amazon's top and bottom line. AWS has first-mover advantage and still controls the IaaS space, but it is facing heightened competition.
AMZN is releasing its Q1 results after the bell on Thursday, April 30th. According to Zacks Consensus estimates, analysts are anticipating an EPS of $6.34 on sales of $73.64 billion. Analysts have substantially dropped estimates amid the pandemic, and the current EPS estimates would represent an over 10% year-over-year decline. Quarterly sales estimations demonstrate a 23% year-over-year increase.
Alibaba (BABA - Free Report)
Alibaba, the Amazon of the East, has control of the cloud computing market in the most populous country in the world, and soon to be largest economy by GDP, China. Alibaba Cloud is the third largest IaaS platform and the largest in the Asian Pacific region, which is digitalizing fast.
Alibaba Cloud has been growing exceptionally fast, with its December quarter results demonstrating 62% year-over-year growth. This segment is still losing money for the company, but it is narrowing in on profitability with every quarter illustrating economies of scale.
According to Alibaba CEO, Daniel Zhang, "adoption of cloud services in China will be driven by not only the need of lower IT costs, but also by digital transformation of business models and the processes."
The market in which Alibaba dominates is growing fast, and with its cloud leadership, I expect that it will grow even quicker. Alibaba faces competition domestically and internationally from AWS, Azure, and Google Cloud (GOOGL - Free Report) . I believe that Alibaba's local ties and innovative edge give the firm a competitive advantage in China and the broader Asian-Pacific market.
Alibaba is expected to report its March quarter earnings on May 20th. According to Zacks Consensus estimates, analysts are expecting an EPS of $0.88 on sales of $15.28 billion. This would represent an over 30% year-over-year decline in EPS but a 10% topline appreciation.
The cloud computing market is getting ready to take flight, with the world working from home, the necessity of cloud technology has never been more evident. IaaS is the fastest-growing cloud segment, and the 3 stocks I discuss above are well-positioned to continue dominating the space.
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