Amazon, Microsoft and Google Report Cloud Gains - And Reveal How They're Competing

Amazon, Microsoft and Google each made their case about why they're poised to capture the remote work trend and the cloud services market in the longer term.
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Investors got a closer look at the state of the cloud race this week.

Alphabet  (GOOGL) - Get Report, Microsoft  (MSFT) - Get Report and Amazon  (AMZN) - Get Report each reported their March quarter results, including details on how their respective cloud businesses are faring in the coronavirus pandemic. The quarter was the first that overlapped with the coronavirus pandemic, with stay-at-home orders accelerating worldwide in the second half of March.

The Dow Jones Industrial Average closed more than 600 points lower on Friday, with Amazon and Apple  (AAPL) - Get Report leading the slide after cautioning investors on the impact of coronavirus on their operations.

One of the bright spots on Amazon’s mixed report was the performance of AWS, its highly profitable cloud business. The segment  generated revenue of nearly $10.3 billion in the March quarter, up 32.8% suggesting that the segment still has ample headroom despite its scale.

“AWS continued to impress with 33% growth which, based on its sheer size, grew more in one quarter than the entire annual revenue of many cloud plays,” said Patrick Moorhead, lead analyst at Moor Insights & Strategy. “I will note that the company, for the first time, hit $10B in quarterly revenue, an incredible milestone and on to making an annualized, $40B revenue company. This makes AWS larger than Salesorce.com and SAP.”

Amazon is still the undisputed leader in the overall cloud infrastructure market -- and on a shareholder call, CFO Brian Olsavsky pointed out its diverse base of customers and parters as an advantage. But analysts note that the overall cloud infrastructure and services market is still in the early innings of a long growth curve, with plenty of opportunity for various players to capture more of the market. Amazon shares fell 7.6% on Friday to $2,286.04 after it cautioned it could post a loss for the current quarter.

Microsoft’s Azure grew 59% last quarter, the company told investors this week, although it doesn't break out raw dollar revenue numbers for Azure. Its Intelligent Cloud segment, which includes Azure as well as various server products and enterprise services, brought in $12.3 billion in the March quarter despite the pandemic’s economic impact for many businesses.

“There’s no question that moving to the public cloud, even in a time like this, is just capital efficient,” said Microsoft CEO Satya Nadella on a call with shareholders. “If you think about for any business, the conversations we are having is even for businesses that are having tough economic cycles, one of the smartest things that anyone can do...is to transition to the efficient frontier as quickly as possible so that they can have more agility, more elasticity, and better unit economics coming out of this or even while you’re in this crisis.”

So what do Microsoft’s results say about its competitive position? It’s not as simple as looking at growth rates -- after all, Amazon’s AWS is an older and larger business so the law of large numbers dictates that its growth rate would be lower.

Look at the rest of Microsoft’s portfolio for evidence of its strong competitive position, said RBC Capital Markets analyst Alex Zukin.

Microsoft is “already there with you in the trenches; they have a clear and consistent message on how to help you in a crisis, how to enable your business, and how to do it securely,” Zukin said. “They have every tool in the toolbox, and it’s going to be a structural advantage against Amazon.”

Microsoft noted that the full impact of the coronavirus pandemic likely won’t be felt until future quarters, but the company has touted the high usage -- and strong security protocols -- of remote work solutions such as Microsoft Teams in recent weeks. It also recently rebranded its collaboration suite to Microsoft 365, and launched a non-commercial version geared at personal and family use.

Shares of Microsoft closed 2.6% lower on Friday to $174.57.

Alphabet also spotlighted the growth of its Google Cloud segment in light of new demand for remote work and communication technology overall. Earlier in April for example, Google revealed that G Suite crossed 6 million paying customers

After reporting its better-than-expected March quarter results, Alphabet's CEO Sundar Pichai argued that Google is more durable than ever, given its investments in newer lines of business such as cloud services. 

“Our business is more diversified than it was in 2008,” said Pichai. “For example, Cloud. In the public sector, we are helping governments deliver critical health and social services. We are supporting the state of New York's new online unemployment application system as it deals with the significant increase in demand.” Google Cloud revenue rose 52% to $2.78 billion last quarter. 

"Google Cloud showed strong growth this quarter, continuing the trend of rapid growth that began when Thomas Kurian took the reins," said Daniel Elman, an analyst at Nucleus Research. "With [stay-at-home orders] unlikely to end soon, more companies will move part or all business operations to a cloud environment, and Google is well-positioned to capitalize on this momentum. Slowing investment in data centers would be shortsighted here, as expanding the availability and performance of the Google Cloud is essential to its long-term success."

Pichai told employees in a recent company-wide email recently that it's "recalibrating the focus and pace of our investments in areas like data centers and machines," in addition to other cost-cutting measures. It's unclear how the recalibration would impact Google Cloud in the near term. 

Shares of Alphabet fell 2.18% on Friday to $1,317.32.