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The Road Ahead For Cloud Computing

7investing Lead Advisors Matthew Cochrane and Anirban Mahanti discuss the future of several cloud computing stocks.

November 10, 2022 – By Samantha Bailey

Digital transformation isn’t just a buzzword, it is a reality. And cloud computing is the chief protagonist of this game. Are we still in the early innings of the cloud computing journey? What impacts are the current macroeconomic headwinds having on this sector? 7investing Lead Advisors Matthew Cochrane and Anirban Mahanti consider these and other related questions in this podcast.

The Future of Cloud Computing Stocks

Cochrane and Mahanti look at the recent results from the cloud hyperscalers: Google Cloud Computing (GCP), Microsoft Azure, and Amazon Web Services (AWS). According to Mahanti, GCP’s performance was the bright spot in Alphabet‘s (NASDAQ: GOOG) recently reported results. Microsoft‘s (NASDAQ: MSFT) Azure and Amazon‘s (NASDAQ: AMZN) AWS have experienced some softness in recent quarters. However, their growth at scale is still phenomenal. AWS remains the crown jewel of the Amazon empire in so far as generating gobs of operating income is concerned!

Diving into the Macroeconomic Environment of Cloud Computing

In the podcast, Cochrane dives into management commentary about managing the macroeconomic environment. Both companies focus on their customers’ long-term success, making these platforms sticky and incredibly powerful over the long term. In particular, Microsoft and Amazon have hinted at working with customers to optimize workloads and, thus, costs to help them through this difficult time.

Towards the end of the podcast, Cochrane and Mahanti identify a dark horse in the race for being the fourth pillar of the hyperscale revolution. Which company is it? And does it deserve your attention? Listen/watch to discover this company’s name and learn what it is doing to tackle the big three of cloud computing. 

Readers interested in this topic may want to pair the podcast with Anirban Mahanti’s quarterly cloud computing checkin report. The November 2022 edition of this report is available here.



Matt Cochrane 0:09
Greetings, fellow investors. I’m Matthew Cochrane, a lead advisor at 7investing where it is our mission to empower you to invest in your future. We do that by providing monthly stock recommendations to our premium members and educational content that is freely available to everyone, listeners. Today, I am very excited to be joined once again by my fellow co lead advisor Anirban Mahanti. Anirban, how are you doing?

Anirban Mahanti 0:36
Oh, good, as good as it gets, given the how the markets up. But yeah, I’m good.

Matt Cochrane 0:41
It’s not- it’s not been a great market that is for sure. For those who don’t know, every quarter, for almost the last year now, every quarter, Anirban writes a review of the major cloud players checking in on how Amazon’s AWS, Microsoft Azure and Google Cloud are performing this this quarter, he once again wrote a very insightful piece covering these important tech segments. And I thought it’d be great idea to hop on a podcast and get his take on how these cloud cloud performers are performing. I’m along the way, I’ll probably chime in with a few of my opinions to have in this piece a near bonds pieces free to everyone, you don’t have to be subscriber, just go to seven and click on the research tab on top and scroll down to find his cloud computing check in I think this is gonna be a fun and informative show. And one very relevant to investors. So Anirban, maybe we can just start there. Why is this so important to investors?

Anirban Mahanti 1:41
So like, you know, we’ve been talking about the cloud transformation software companies all going to the cloud enterprises, one on one wanting to go digital move to the cloud. And this has been a, you know, it’s been a long journey, but steady, slow journey that we have been on. And often what happens is people think that, you know, we’ve been talking about cloud computing for maybe a decade, is it over what innings of the game are we in, and so on, so forth. So what I thought is, one of the ways to sort of get a check in and understand what’s happening in cloud computing, is to look at the infrastructure players. And by that, what I mean is, these are the companies that are building the data centers and regions and the software tools and all the other libraries that you need to deploy software on the cloud, right. And the big three are, in this case, Amazon Web Services, Microsoft zero, and good Google Cloud computing platform. So looking at how those guys are performing, gives us sort of a window to the entire industry tells us, you know, if you look at their growth rates, and sort of tells you what you can expect people who work on top of it, people who are serving on top of it, how they’re performing, right. And it’s not just about cloud computing companies, even you know, if you think about Netflix, for example, its streaming runs on cloud platforms. So a lot of stuff actually runs on the Cloud Platform. So it’s a it’s an indicator, it’s a window to the digital world.

Matt Cochrane 3:11
It’s a huge, huge growing part of the economy. Right. And Kate right here, if you’re watching on YouTube, right now, we’re showing a headline from Gartner, the global it like specialists and researchers and consulting firm, and they forecast that worldwide public cloud and user spending to reach nearly $600 billion in 2023. That would be a like about a 20% increase from 2020 twos total. So this is a huge industry. You know, a quote from a Gartner is Vice President analyst said via nag, he the current inflationary pressures of macro economic conditions are having a push up, push and pull effect on Cloud spending. Cloud computing will continue to be a bastion of safety and innovation, supporting growth during uncertain times due to its agile, elastic and scalable nature.

Anirban Mahanti 4:07
Absolutely. So I think, you know, that’s an interesting comment that, like, you want to move and use more efficient technologies during inflationary times. Technology, by definition is deflationary. You want to move away from having your own on, you know, on prem infrastructure, it’s costing you money, and you buy all this equipment and, you know, provision for data centers moving to the cloud that’s advantageous to you. At the same time, you know, as he indicated, it’s elastic in the sense that you can control how much you’re using. So if there’s a usage based price, you could actually reduce your usage if necessary, right, and therefore, reduce how much you’re spending. So it’s a and of course, everybody loves going from a sort of, you know, you know, capex, which is investing in in computers and data centers to OPEX, which is, you know, operating costs for running in the cloud because you know, when you’re using Cloud infrastructure, and you basically have no operating costs. So somebody else takes the capex, for that, which is these big guys. They’re spending the capex and they and their game is, let’s get lots of lots of people to use our infrastructure, then we can amortize our costs across all these people, and build scale, because you really need scale in cloud. So that’s the story from the cloud infrastructure players has really been about scale, you know, building a large scale, so that can drive down costs, making it easy for providers to run their applications on top of it.

Matt Cochrane 5:33
Absolutely. So how about we’ll just take this from smallest to biggest. So let’s start with alphabet. Now, nearby, we recently did a podcast when we talked about just like the overall quarter for alphabet. And you when we brought up Google Cloud, you said that might have been the brightest spot for the quarter, the quarter, you know, Google Cloud segment revenues were $6.9 billion. That’s up 38%. Year over year, why was this such a great result for alphabet?

Anirban Mahanti 6:03
Well, well, first of all, like, you know, about Lodi segment results, this is the result that actually did not go backwards. In the sense, you know, as I said in that podcast, so I thought, you know, alphabets results looked bad, but they were not really that bad compared to the heart, the economy is difficult and all this. But you know, unlike what people would expect, like, you know, during hard economic times, even you’d expect some slowdown in cloud. But that was not the case. For Google Cloud, Google Cloud actually grew nicely. There was a bit of an acceleration versus previous quarters, right, which is, which is what I was alluding to saying it’s the bright spot, that the growth rate actually went up, which at its scale is pretty interesting, and pretty phenomenal. In my mind, not the thing to remind Yeah. So you have a chart there beautiful chart that shows the Google Cloud revenues and their operating income. So it’s still operating losses, it’s going down, it’s negative, it was about nearly $700 million of loss. But it’s just a beautiful curve going up and to the right. One thing, I want to clarify that when we talk about Google Cloud Platform, or Google Cloud revenues, is not just Google Cloud Platform, it’s got other cloud services in it. So there’s workspaces and things like, you know, the Google Doc, and all of those things, people are using Google emails that businesses use and things like that all of those are included. So you sort of kind of had an estimate how much is actually purely Google Cloud? Platform? GCP, you know, roughly estimated this to be somewhere between, you know, 70 80%, roughly, you know, it’s it’s, it’s, again, it’s a guess, because I would think that’s the bigger business versus their workspace business. That puts this on a roughly around $20 billion annual run rate, right. So you think about it this way, the way I think, the way I think this is phenomenal. So $20 million, run rate business, still losing money. But I think that that reason it’s losing money is entirely by choice. Like, they’re just trying to get more and more shares, doing the investments that they need to build the scale to, you know, and compete with the others, which is zero and an AWS, Amazon Web Services, but $20 billion run rate growing at, you know, north of 35%. That is pretty, pretty significant. So I thought it’s quite the one saying, Well, let me think

Matt Cochrane 8:26
about this. So like, if you’re an alphabet shareholder, as as I am, and I believe you are to, you know, as shareholders, obviously, when we buy shares in alphabet, we’re not just buying Google Cloud, we’re not just buying cert, you know, you’re buying the whole thing. When can shareholders expect this to be instead of being a headwind for earnings and a headwind for profits? And to be a tailwind instead? When will this when you think this is going to like, you know, when is Google’s gonna flip the switch on this where we can actually start seeing profits?

Anirban Mahanti 8:56
Yeah, that’s the million dollar question or the billion dollar question. You know, I think, I think if they wanted to, they could be profitable right now. That’s my take, like, I mean, it’s, it’s basically they need to turn that, you know, minus 700 million to zero, which I think they could take some costs out. And so, but I would think that they would let this grow for some more time, maybe you know, your present, Okay, a couple of years, it’d be my guest before you can start seeing profitability here. But they’re just trying to grow the scale. And look, all alphabets other assets are just equally powerful, right? I mean, there’s nothing like Google Search to YouTube. Again, there’s nothing like YouTube, I think we’re the platform. So those two platforms are in an Android, right? So those three platforms are unique. You know, in many ways, two of them are actually monopolies. If you want to think about monopolies, the two of them I would open is YouTube. Maybe it’s not a monopoly anymore with with tick tock and the short videos and things like that, but I be you know,

Matt Cochrane 10:00
It’s pretty good for videos. It’s pretty, it’s pretty close. It’s

Anirban Mahanti 10:04
pretty close to monopoly. Because if you want to watch videos for free, that’s pretty close monopoly, there’s a monopoly business, which is still growing at a healthy clip, which is basically selling at a very good price. So I think, you know, you know, you get these opportunities on companies like alphabet when the strong economic headwinds, and, you know, pressures on earnings, right. But otherwise, I thought, like, all round, I think it was good. Google Cloud was definitely a bright spot, growing really well and competing really well against the other two bambusoides.

Matt Cochrane 10:34
Yeah, I like what the CEO said, I’m just going to read a short quote here. And it’s a recurring theme we’re gonna see as we go through these companies, he goes long shared that cloud is a key priority for the company, the long term trends that are driving cloud adoption, continue to play an even stronger role during uncertain macro economic times, Google Cloud helps customers solve today’s business challenges, improve productivity, reduced cost, and unlock new growth engines. That’s something we’re gonna see like all these companies are going to, you know, they they keep reiterating, like during uncertain economic times, like, that’s actually a long term boon for the cloud, even though it might produce some short headwinds. Long term, it’s good, because, you know, it’s turning a fixed cost that companies have into a variable cost. Yeah, it’s a quick

Anirban Mahanti 11:25
cost into variable costs. It’s also making companies more efficient. And it’s also extremely sticky. Once you move to the cloud, you got to stay there. So you know, and in the short term, we might see some headwinds, and we lots of cloud companies and the valuations have compressed and all of these things because of the interest rates. But I mean, the fundamentals are many of these businesses haven’t been, you know, look really strong. And the valuations just make them really interesting. But, you know, so the last thing I wanted to say is that, you know, another way to look at Think about good clouds progress is to look at remaining performance obligations, which is basically committed contracts, how much? How much dollar figures have customers committed to spending with Google Cloud platforms? Over time, that number stood at about 50, some billion $52.4 billion to be more specific. That’s an increase of 41%. Year over year. Okay. So, again, those those dollars and can be recognized over time, that’s just an indication of how much money is coming into cloud. So, you know, when Google’s cloud CEO sees that number, he says, Well, you know, there’s absolutely no reason to slow down the push for growth, right? Can you’re locking in $50 billion, and contracts, you want to lock in the next 50 billion, as well. So you aren’t going to be working hard, and they know the sticky, right? So once you’ve got those people in on the platform, they’re gonna continue spending, probably for decades. So

Matt Cochrane 12:50
yeah, absolutely, absolutely. All right, so let’s move on. So next up is Microsoft Azure, Microsoft Cloud No, before, I’m gonna say I’m gonna read off the numbers. But like, I have a quick, you know, as a Microsoft shareholder, like, I always have this problem, Microsoft, they have very nebulous categories of life, like they have three business segments, but then they’ll say cloud revenue grew this much. And that’s not in any segment that’s just kind of across segments. They just like, categorize certain things as cloud in certain things is not, but Microsoft Cloud revenue, and the first quarter of 2023. That’s their fiscal quarter there. And it was basically $26 billion. That’s up 24%. Year over year, they said, you know, on a constant currency basis, like foreign foreign exchange rates were like, a definitely a headwind growth was 31%. As your and other cloud services revenue grew 35%, that’s 42% in constant currency. So we saw like, you know, a juror is still growing super fast in like $25 billion. That’s that’s real money in Iran.

Anirban Mahanti 13:54
Yes, absolutely. So yeah, I don’t click on that. So the so Microsoft, for example, reports, intelligent cloud, but that’s not all of the cloud, it’s very difficult to figure out where things sit. So you have to look at their disclosures during the earnings call, which is where our numbers come from. The so yes, as you agree with 25%. And the overall Microsoft Cloud bucket grew at a pretty slow or, you know, slower than usual rate, that growth rate has been slowing down over the past few quarters. And 35% is also I think, slower than it was before was used was ticking at 40. But yes, what we need to remember is that this is a significantly larger business, for example, compared to GCP. Right? And the way I started think about this is because of the way they sort of categorize everything clouds, for example. Microsoft’s Office suite will also be part of the cloud revenue, right? So I serve when when Nadella goes you know, 25 billion, I don’t say okay, maybe 60 PCs. At 70% of that is actually zero. So you know, that’s a pretty significant run rate, about 60 billion plus annual run rate, even if it’s growing at 25.6%. And again, there’s a foreign exchange, headwind was pretty strong. That’s pretty significant. And you just get the scale, it’s pretty phenomenal. I do not talk about the remaining performance obligations for Microsoft, because they do have a lot of remaining performance obligations from its other certain non zero related services. Right. So things like, you know, office, and so on, so forth. So I think it’s very difficult to make your head heads, two heads, sort of, you know, apples to apples comparison. But again, pretty phenomenal, although the growth rates have slowed down. And yeah, I think the other caveat, or if you want to compare the two, the thing to remember is, while the Google Cloud revenue is 38%, GCP, revenue always grows at a much higher rate than overall Google Cloud. So probably Google Cloud is actually growing probably north of 40%. Right? Whereas this one is probably growing North of maybe 35%. Right? So again, five percentage points, but again, it’s a significantly bigger scale. So something to keep in mind.

Matt Cochrane 16:15
So this is something we’re going to really touch on with AWS too, but like, you know, on the conference call, they were asked, like, hey, as your missed estimates by a percentage point, like, like, what’s going on here, and this is Second quarter roads, Miss estimates by each time, just a percentage point or two, so not much. But they asked what’s going on here? And they said, you know, we’re, we’re proactively helping customers optimize their spending. And they think that’s the right thing for us to do as a company on behalf of our customers, and our shareholders long term, like, you know, basically, I think they’re saying, like, look, we’ve advertised cloud spending, as being cheaper and more efficient for business for a long time. And now that we’re seeing their first real downturn, you know, in the in the last decade, well, I, you know, there’s obviously COVID, but like, you know, one of our first real downsides we’ve seen in this last decade, we gotta live up to that building a building, and we have to optimize their workloads. Like, we have a quote from Satya Nadella. Here he goes, our job number one for large swaths of our customer facing organizations is to proactively help them optimize, in fact, our incentives and our customer success team are lined up with them, helping customers to, quote, do more with less and to quote,

Anirban Mahanti 17:34
absolutely, that’s the right thing to do, right, because you know that things are sticky. Once they come to the cloud, to be here with you, they’re going to increase spending over time that you want to see, the good business, people will realize that, for you to succeed, you need your customers to succeed. If you just you know, if you if you squeeze the lemon too hard for customer dies, that’s actually not a good thing. Right? So you want your customers to succeed. And I think that doing the right thing, you know, ensuring customer success is the right thing. Again, it’s phenomenal, but this business has come from and where it is going. And it’s again, a great indicator of sort of how strong the cloud is, right overall.

Matt Cochrane 18:18
So like, well, I have you let me ask you, because, okay, again, I’m gonna Microsoft shareholder, I’m always reading their conference calls. And a lot of times like these companies, so they’ll say things that sound great to me, but like, I really don’t know how to like filter it. So I want to I want to run two things by you one on the conference call. They call that how like, they are, like the cloud of choice or whatever, for companies running SAP workloads on the cloud, and they throughout Volvo as an example. And then they go, they’re the only cloud provider with direct and secure access to Oracle databases running an Oracle Cloud infrastructure, making it possible for companies to use capabilities from both. And like as examples for that they threw out FedEx and Marriott, how big? Is that? Kind of? I don’t know, if you want to call it interoperability or that like, cohesion between the two, the two platforms? How big is that? Is that a big deal?

Anirban Mahanti 19:14
I think it’s a big deal. I mean, look, I think increasingly people want to be multi cloud. So allowing interoperability having direct connectivity, so that you know, you can reduce costs, reduce latency, make things faster and faster, cheaper, better, I think is is no doubt a feature. And nobody, I think, unlike nobody wants to be locked, as as a customer, you don’t really locked on to AWS or Microsoft or GCP. You know, you it’s, it’s, you know, even just from simple fault tolerance point of view, you want to be multiple cloud, you know, and the other reason for that is there are certain things that are good with one cloud provider certain with another and you want to use the best of each right and sometimes you Want to use, you know, other tools and services that run on top of them? Some things might be better somewhere else, and you just want to have that ability. So I think I’d say that’s it. That’s a good feature to have. And then, you know, with respect to something that you were saying earlier about missing estimates, they look, the my thing with estimates is if the company didn’t miss the estimates is the analyst who missed the estimates because they made the wrong prediction. If the company gave the guidance, and then mistake, that’s a different story altogether.

Matt Cochrane 20:31
I think it was their guidance, but I’m not positive on that. Don’t quote me on that. I’m not, I think they’re guiding us by a percentage point, but I’m not sure.

Anirban Mahanti 20:39
Okay. So if they missed any, you know, okay, they’re doing a bad job of forecasting. And then, you know, the CFO needs to have a little bit if somebody else is being, you know, estimates that it’s not, it’s neither here nor there. Foreign exchange are the number of conference calls I’ve read. So for example, ServiceNow is conference called the foreign exchange headway. It is phenomenal right now, with the USD strengthening. So, you know, it was like 600 600 700 basis points and ServiceNow. It’s crazy. You know, next quarter, Apple is saying it’s, it’s, it’s like 1000 basis points is your foreign exchange headwind. That’s just phenomenal. So it’s those are real problems that these companies have. But these things, again, are cycles, right. I mean, at some point in time, the headwinds will go away, they’ll become a tailwind.

Matt Cochrane 21:26
Of course, of course. And I don’t know about you, but my overall philosophy, when a company misses estimates, or guidance by a percentage point or two, I mean, anything in the low single digits, to be honest with you, that to me is, you know, that’s, that’s just not important to me, to be honest. Like I just, you know, what, come over, they started missing, like over 5% are the high single digits and 10%. Okay, now we can talk through, something’s going on. But when you miss by a percentage point, like, to me, it’s a you know,

Anirban Mahanti 21:58
it’s a non starter. Yeah, I agree. I don’t think I criticize companies for a serial offenders, if you’re seriously, like you just keep missing every quarter. That’s just bad. But this means that you don’t have that. That means your your, there are some companies that have done that, which I think is a problem, which basically just shows the poor planning for the finance department.

Matt Cochrane 22:24
Sure, sure. All right, well, let’s move on to the grandfather, the OG of cloud services, AWS, AWS net sales increased to $20.5 billion. That was up 28% year over year, that’s excluding the impact of foreign exchange. And that’s now representing an annualized sales run rate of $82 billion. And hereby, Ws

Anirban Mahanti 22:51
AWS has been phenomenal. And it’s AWS, in many ways is the bright spot for Amazon. Right. It’s where the profit is, all the profits are. So if it was a solid result, the thing to note with AWS, though, it’s been, there’s been a steady deceleration and its growth rate. So it decelerated from 23% year over year growth in q2, two, which was and then that was this measure from 37%. So they I think, are seeing some significant, I think, macro impacts, and, you know, usage based impacts, and things like that. But this is a nicely profitable business. But again, here too, I think in a typical Amazonian fashion, there’s a lot more expenditure going on than then than meets the eye in in many ways. And therefore operating profits are only up like, what 10 11% versus the revenue being upfront. So they’re not, you know, the there’s operating D leverage going on right now. But Amazon has these cycles that is goes through where it makes, you know, half of its capex probably is datacenters, and things like that. You know, the remainder is probably, you know, warehouses and things like this. So, yeah, so the bottom line numbers, I thought, were not that great. Given that, you know, at this scale, I would think that they would consistently deliver operating profit at a nice, you know, 25% margin or so 30% margin or so. But, again, at that scale, it was phenomenal. The other way to think about is the longevity of the platform and the future potential apart from that remaining performance obligation that I talked about alpha it was about 50 for these guys are 100 plus billion. Right. And that was up some phenomenal number like 50 50% Plus, I was actually higher, up year over year and higher and I’m just trying to look up that number if I can find it. Yeah, 100 and 4 billion in q3, up 57% year over year. So yes, that’s going to be recognized in you know, multiple years over the future. But again, if you’re the leader of AWS and you see that kind of number, you kind of Want to invest into the future, you kind of want to make sure that you know you have the best data centers and the best infrastructure and best everything so that you can keep getting those dollars in through the door. Right, and then locking in those dollars here. So again, I have an overall pretty significant,

Matt Cochrane 25:17
yeah. So that, you know, they’re talking about the growth rates and the slower growth rate they’re talking about, like the margins. So let me read you a quote, and I’ll let you respond to it. This is their their CFO talking, he goes here and your first question about cost optimization. He goes first are some industries that have lower demand that’s showing up in our volumes, as probably like other companies as well, things like financial services, the mortgage business being down crypto currencies have been down. And he goes, we’re very strong in some of those industries. So that’s part of it. But basically, what we see is customers are looking to save money, versus they’re committed spend, we have options for them to do that. They can manage workloads better, they can switch to lower cost products that have different performance profiles, they can switch to Graviton ships that have higher cost performance ratios. So all really good things for the customer. And for Amazon long term.

Anirban Mahanti 26:11
Yeah, so it what is interesting is that the comments basically seem like it came out of Satya Nadella his mouth, right.

Matt Cochrane 26:18
Like the similarities in the two conference calls. You know, they’re obviously both seeing the same things out there and trying to help their customers navigate this macro economic, you know, environment where, you know, there’s softening, it definitely appears they’re softening consumer demand. They’re softening enterprise demand.

Anirban Mahanti 26:39
Absolutely. And but I think that they’re doing the right thing by the customer, I think is is what ensures long term health of the business and long term shareholder returns. They know this. They’ve been at this for many, many years. So yeah, like I don’t, I think that’s the right thing to do. And they’re doing the right thing. And, again, to me, when I look at these three results, I just say that word cloud is just fine. And, you know, there’s a lot of valuation compression, but you know, that sort of class, you know, class leading cloud software companies should do really well, because this sort of is basically indicative of the underlying, you know, potential growth, because this is sort of the underlying infrastructure for those sort of things.

Matt Cochrane 27:23
Sure. And another thing, they talk about a lot on their conference calls. And in the past two, and something like I get again, let me ask you while I have you, right, because these are things I read when I go through the conference calls, and it sounds great to me, but I always wish I had a better filter for these things. A very quick quote from the CFO, the breadth and depth of our service offerings enable us to help them like their customers, do things like lose storage to lower price to your options, and sift workloads to our graviton? Chips? Okay, so the graviton, three processors, they say, deliver 40% better price performance than comparable x86 based instances? How, how big of a deal is Amazon’s chip making processes here? How big of a deal? Are there Graviton chips that they constantly talk about?

Anirban Mahanti 28:08
Yeah, so I think it’s a big deal. I am not like it’s a big deal in the sense that if you can get so slim in that track, if in many ways, Intel has dropped the ball on being the leading edge of stuff. Right. And, you know, I think it started with the basically failure in mobile. Right, so they failed SOC and mobile, basically arm technologies to catch up. And then I mean, it’s I like to say, the, the best chip design company today is not Intel, it’s up. They are the leading edge chip design company, because they design the best chips, and then they get produced by other companies like TSMC, in Taiwan, semi or Samsung, or something like that. But they’re all ARM based. So that’s something that other companies have also picked up on. So it’s not just, you know, see, Apple probably was the lead, you know, Husky in that game, you know, there was one of the first ones to sort of build an internal team and work really hard on it. But everyone is now on that bandwagon, trying to do more with it, it makes sense because you can get more performance out of it. And ultimately, at the infrastructure layer, there’s a lot of competition in many ways. You can’t, you can’t really have, you don’t really have supreme pricing power in that sense, right? Because if you price twice as much as zero, people are not going to come to you. Right? So you have to compete at scale at the lowest possible pricing point and then offer things like multi cloud so that people are able to, you know, divvy up their workloads across different things. Maybe you have certain platform services that you offer on top of it. That is what is bringing people to you know, maybe you have some AI capabilities, ml capabilities, maybe some data processing capabilities that certain applications want from certain cloud providers. Right. So I think that it’s very important to keep leading but what I like to say is that they are not a They’re not fully across what Microsoft is doing on that front. But they’re not the only one because Google is doing the same thing. Right? So the, you know, designing it on chips that have better price performance, or whatever sort of optimization you want to do is a game that other people are playing as well. And

Matt Cochrane 30:21
so let me ask you a question. And Iran, let’s say, hypothetically, we could spin out Google Cloud, we could spin out AWS, and we could spin out Microsoft Azure, and you can invest in one of those companies. Who would it be and why?

Anirban Mahanti 30:37
So the thing is that I would like to know, Well, okay, the answer to that would depend on it depends on what valuations they trade on in the market, right? So

Matt Cochrane 30:47
let’s assume whatever valuation metric you want to use, and I guess, would have to be based on sales, because Google Cloud doesn’t make a profit. But let’s assume so. So let’s say like, it would be like a price, they would all have the same price to sales ratio, I guess, which I you know, so let’s, I guess we let’s start there, as you know, being on equal footing with valuation. Yeah.

Anirban Mahanti 31:11
So in that case, like, you know, depends if I, if I want to say it’s a hard one to answer, because probably, they would not all have the same multiple, then you could choose based on the multiple, if they all have the same multiple, then I would pick the most profitable ones, you’d be AWS? Right. My guess is AWS is more profitable than a zero, but I don’t know, if zero transact were more profitable and available for a cheaper price. And that would be the logic for investing, investing in one of them if they were the same multiple, right. Largely, because I think, you know, scale gives them a significant advantage in terms of being able to sort of amortize costs and things like that, that, you know, and so, yeah, that’d be, you know, probably pick AWS over the others at the same valuation.

Matt Cochrane 32:00
Right, right. Okay, so let me ask you one more question. These are, these are the biggest, you know, at least us the big three cloud platforms. Is there anyone else out there? That could possibly, like make it a big four? Is there anyone else here that could be a competitor on on relatively equal footing with these three? Or is this like, locked in as an alga? oligopoly with like, you know, just these three companies at top?

Anirban Mahanti 32:29
Yeah, so in a way, it helps to go back a few years and say that, you know, if you if you went back three, four or five years, then three years, maybe Google Cloud was actually really small at that time. Right? It came from behind us made a significant position for itself. It’s number three, the company, you know, one couple that you and I have talked about is Oracle’s Oracle’s cloud infrastructure business has been growing really quickly, it’s just shy under a billion dollars runway. Right now per quarter, it grew like some 50 60%. And if you I think, excluded the 50 some percent. And if you exclude it, hosting services, out of it, you just focus purely on a pure infrastructure side, and it actually grew at like, what something like 70%, I think, some huge number, infrastructure services grew 70%, that is a phenomenal number. So that, you know, that can compound pretty quickly if they can do that. And Oracle’s claim is that they being late to the game allows them to develop better data centers, you know, more modern, they can have a modern technology stack. The other claim is that they are probably the among the few companies that have enterprise at scale cloud services that they’re running on their own. So they’re basically talking about, you know, cloud databases, like Oracle databases, and therefore, the experience of running that on their own infrastructure means the needed infrastructure anyways, for running. So it’s like, you know, doubling down. So you know, you may you build the infrastructure that works for you, and then you sort of can sell infrastructure services on top of it. That’s the claim that they have today, there’s a potential for that to emerge as the number four I mean, there’s a lot of jostling going on. And number four, right, so there’s IBM, there’s these guys, there’s many of the Chinese players, not big players in the US market, but they are internationally in many places. Although I don’t know what’s going on with there’s a lot of geopolitical issues there. But Alibaba, for example, has been a big, big, you know, serve, you know, can I become the number four in this place? So I think Oracle would be something that we should watch. They’ve got a presence across multiple regions, largely because of the data set of the database presence. They have strong links inside government, which is another big spender in this area. So and they have strong links and enterprise from the past, you know, the history in databases, so they can actually be a pretty quick grower. So something to watch. They can, you know, emerge as a number for have tried and and I think in a multi cloud environment, you know, multiple players can win. The thing to watch though would be is our infrastructure services going to afford to see pressure on margin because of more competition?

Matt Cochrane 35:13
Sure. You know, one thing. Well, guys a couple things about Oracle one, you know, they don’t have any okay, you haven’t seen this too much with Microsoft yet. But Microsoft, Amazon and Google are just so big. They’re just naturally going to attract regulatory pressure, right? Like the FTC, like Amazon wanting to buy iRobot, you know, of Amazon sneezes, like, they basically have to get the FTC approval, right to do anything. You know, and same thing with alphabet. Microsoft, we haven’t seen that too much. So we’ll see if this Activision Blizzard acquisition goes through, which I think it should for the record. But you know, you do it is attracting some scrutiny. Oracle, even though it’s a huge market cap, it doesn’t, it doesn’t attract the same amount of attention. You know, and it just, you know, this summer it finalized assert its Cerner acquisition, it was $28 billion in all cash deal. And Cerner is this leading provider, our digital information systems used within like hospitals to enable like doctors and medical professionals to just deliver better health care right to patients. And and it said, Oracle said Cerner, when they made the acquisition, they said Cerner is going to be the company’s anchor asset to expand it to healthcare. And it’s expected that the acquisition acquisition should help Oracle scale up its cloud business, and the hospital and health systems market, which makes sense. I mean, that’s a huge acquisition, Cerner was a huge company and big player in that market. You know, if it can make a few acquisitions like that, and it has a, I haven’t looked at it lately, but I believe it has a pretty cash rich balance sheet. You know, it certainly has high margins, you just wonder, like, it might be able to catch up even quicker, then, like, you know, Google Cloud could catch up to like Microsoft, in an Amazon, for instance, because they can make acquisitions like that.

Anirban Mahanti 37:07
I’d say I agree with you. Yeah. And the free free cash flow rich companies. So you know, the cash keeps building from its, you know, database cache. Cool. So yeah, I agree with you. It’s something to definitely watch. It’s, you know, I didn’t add it this quarter. But I want to definitely add Oracle to my watch, you know, cloud check in watch list. For next quarter. The reason I think they added is I had looked very closely at what IBM is reporting for infrastructure. And, you know, it could turn out that a multiple of them are sort of at that $1 billion run rate all fighting with each other. So just wanted to make that show. But it did, you know, it did catch my eye. That’s, that’s pretty phenomenal growth rate at a billion dollar run rate. Now, the

Matt Cochrane 37:47
other thing I wonder in, so forgive me, I don’t know Oracle, as well as I do, the other companies we discussed. But I’m, like, I do wonder is their cloud business just cannibalizing their, like existing legacy business? Right, with like, their on premise databases and servers and all that stuff? Is it just a matter of like, is cloud just growing so fast? Because they’re just moving people over to the cloud, like existing customers? Or is it actually like, new business for them? I guess?

Anirban Mahanti 38:16
Yeah. So I think this combination of that happening, like both, right, so like people are using their infrastructure, because, you know, they could, you know, they could force people’s hand by saying, Well, you know, you can get the best instance of Oracle Cloud only if you run it. Or, you know, Oracle’s cloud database only if you write on Oracle infrastructure, for example. Right. So that sort of thing is possible. But I think they’ve been winning some interesting customers that had Nvidia, for example, as a list of customers, I would think that they zoom, for example, uses Oracle’s cloud infrastructure. So I would think that they are winning and infrastructure deals, whether it’s because of pricing because of multicloud, because of whatever reasons, because of people’s affinity towards Oracle from the, you know, the database, Link links, but it seems like you know, it’s hard to make up all of those numbers by just, you know, getting migration to happen.

Matt Cochrane 39:17
That’s a great way to wrap it up and good summary. Again, a nearby cloud computing, cloud computing check in is available for everyone. It’s not just for members, you can go to seven You can click on the research tab and just scroll down. I think we released it October 31, the last day of the quarter, you should definitely check that out. Again, for my co host, Anirban Mahanti, I’m Matthew Cochrane. We’re both lead advisors and 7investing, where it is our mission to empower you to invest in your future. Have a great day, everyone

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