Is The Future Of Cloud Computing Cloudy? - 7investing

Is The Future Of Cloud Computing Cloudy?

May 7, 2022

Today, almost every software company is cloud-based. Enterprises use hundreds of cloud-based applications. It’s definitely not a stretch to say that cloud computing is everywhere. 

So are the best days of cloud computing behind us? 

One way to gauge the cloud’s innings is to look at the three hyperscalers. I am, of course, talking about the Infrastructure as a Service (IaaS) specialists – namely Alphabet (NASDAQ: GOOGL), Microsoft (NASDAQ: MSFT), and Amazon (NASDAQ: AMZN) – are saying.

Let’s start with the baby among the trio, Alphabet’s Google Cloud Computing (GCP) platform. 

Google doesn’t break out GCP’s revenue. Q1 22 revenue grew 44% year-over-year to $5.8 Billion, driven by a strong performance from “Google Cloud Platform and Workspace.” As Alphabet CFO Ruth Porat likes to remind us on almost every earnings call, and she did it again, noting:

GCP’s revenue growth was again greater than clouds, and that reflects significant growth in both infrastructure and platform services.

GCP’s contribution will likely be around 70% to 80% of Alphabet’s overall Cloud revenue. That puts GCP somewhere in the $16 to $18 Billion annual run rate neighborhood, growing north of 44%. That’s simply phenomenal!

What about Microsoft’s Azure? 

In their recently concluded Q3 2022 earnings call, CEO Satya Nadella said:

It was a record third quarter, driven by the continued strength of the Microsoft Cloud, which surpassed $23 billion in revenue, up 32% year-over-year. Going forward, digital technology will be the key input that powers the world’s economic output. Across the tech stack, we are expanding our opportunity and taking share as we help customers differentiate, build resilience and do more with less.

Like Alphabet, Microsoft too bundles Azure within its broader Cloud segment, including Azure, Office 365 Commercial, and a few other things. But management keeps hinting at the scale of the Azure business in almost every earnings call. For instance, Nadella noted:

The number of $100 million-plus Azure deals more than doubled year-over-year, and we are seeing consumption growth across every industry, customer segment and geography.

Microsoft CFO Amy Hood provided more color, noting Azure grew by 46% year-over-year. 

Given that Microsoft’s Cloud segment includes some mature but well-ingrained offerings like Office 365 Commercial, it might be reasonable to estimate Azure’s contribution to be roughly 60% to 70%. That puts Azure on approximately a $55 to $64 Billion annual run rate, growing around 40%. 

Azure makes GCP’s numbers look small, and that’s with GCP closing in on $20 Billion annually. Now that says something about the scale of the cloud. It sure is massive. 

What about the big daddy of cloud computing, AWS? 

Lucky for us, Amazon actually breaks out AWS results. In the latest quarter (Q1 2022), AWS reported revenue of $18.4 Billion, up 37% year over year. That’s a $74 billion annual run rate. It’s not just the growth at scale but also the profitability of the AWS segment that’s amazing. AWS’s operating income was $6.5 Billion last quarter, thus delivering an operating margin of 35%. Amazon continues to aggressively invest in AWS, too, which again is an indicator of the potential they see in this arena:

Capital investments were $61 billion [for Amazon] in the trailing 12-month period ended March 31. About 40% of that went to infrastructure, primarily supporting AWS but also supporting our sizable Consumer business.

The 7investing Takeaway

The big three are driving north of $145 billion in sales annually and growing comfortably at a 35% per annum rate. Interestingly, the pace of growth hasn’t really slowed as the base sales run rate has increased. That says something about where we are in the cloud computing journey, right? 

Amazon’s CEO, Andy Jassy, has noted that we are still in the early stages of enterprises’ transition to the cloud in the US. He also said that the rest of the world was probably 18 to 36 months behind the adoption curve. Other leaders have been claiming about 15% to 20% of workloads have moved to the cloud. But Jassy has been bolder at times. For instance, Jassy, in his email to AWS employees on Adam Selipsky taking over AWS reigns (when Jassy took the top job at Amazon following Bezos’ decision to retire), said this:

It’s easy to forget that AWS is still in the very early stages of what’s possible. Less than 5% of the global IT spend is in the cloud at this point. That’s going to substantially change in the coming years.

I am with Jassy on this claim. We are still in the very early innings of the cloud transformation.