Cloud computing has become the jewel in Amazon’s (AMZN) - Get Amazon.com, Inc. Report crown. Because the Seattle-based company was the first heavy-hitter to seriously invest in the industry, Amazon Web Services (AWS) today holds the largest share of the cloud market.
But first doesn’t necessarily best, and investors should always look at future expectations, not past performance. Microsoft (MSFT) - Get Microsoft Corporation Report and Google (GOOG) - Get Alphabet Inc. Class C Report have followed closely at Amazon’s heels, and today both hold significant slices of the cloud market as well. In this article, the Amazon Maven discusses these three companies’ potentials.
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Revenues and profitability
First off, an important disclaimer: revenues for Azure are disclosed by Microsoft only as a part of what they refer to as the “Intelligent Cloud,” which also includes Windows and SQL Server, Active Directory, Hyper-V, and other business segments. Alphabet’s Google also did not disclose revenues generated by its cloud services until 2020. Without sufficiently clear data, then, it’s tough to create a perfect, apples-to-apples comparison for these three companies.
This categorical murkiness is why Microsoft’s “Intelligent Cloud” generates more revenue than AWS, even though Amazon boasts a larger share of the cloud market. Still, it’s important to acknowledge that Microsoft has created a cloud titan - and it’s been growing quickly over the past several years: data from 2017 show Azure held 14% of the cloud market, while AWS had 32% and Google, 8%. In 2021, AWS still held 32% and Google’s share rose slightly to 9%. Azure, meanwhile, jumped to 21%.
Revenues and profitability
With all of that said, when comparing these three players, there are three main points that we think deserve highlighting:
1) AWS’ revenue is not only growing, its growth has accelerated. The same cannot be confirmed for Microsoft’s Intelligent Cloud (although, that still does not necessarily mean Azure’s growth is not accelerating);
2) Microsoft’s Intelligent Cloud has operating margins slightly better than AWS’ (which, again, is most likely influenced by the fact that Microsoft groups multiple businesses into one broader category with Azure);
3) Google cloud seems to be the least promising of the three, having reported nothing but operating losses since its inception. The service was launched in 2008 and it has been growing nearly at the same rate as its competitors - but it needs to grow faster than its competitors if it wants to have any chance of eating away at their market shares.
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Wall Street’s takes
Even though it is hard to compare these three players fairly, available financial data shows that AWS remains a market leader and sees promising growth ahead. Azure, a tough opponent, has been closing the gap with AWS and is now not far behind. Google’s cloud services record has been more lackluster - investors may be more interested in its advertising business.
According to TipRanks, Amazon holds a unanimous “strong buy” rating; analysts have given it an average target price of $4,150, which implies a 33% upside. Microsoft is also considered a “strong buy,” and analysts give it an average $370 price target, which implies a 22% upside. Alphabet also has a “strong buy” average rating (though it’s not unanimous - two analysts rate the company as a “hold) and an average target price of $3400, implying a 26% upside.
In short, Wall Street is very bullish on all three of these stocks. For those focused solely on the cloud market, however, Amazon and Microsoft appear to have the upper hand.
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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting the Amazon Maven)