It’s not easy to compare Alphabet Inc. (NASDAQ: GOOGL), Microsoft Corp (NASDAQ: MSFT), and Amazon.com, Inc. (NASDAQ: AMZN) on an apple-to-apple basis.
While it might be hard to pit their respective bread and butter – advertising, computing and software, and e-commerce head on head, thankfully there are some similarities these 3 share.
For one, all 3 of them have become the undisputed triopoly in the cloud space:
- Alphabet (GOOGL) -> Google Cloud Platforms (GCP)
- Microsoft (MSFT) -> Microsoft Intelligent Cloud
- Amazon (AMZN) -> Amazon Web Services (AWS)
Together, they own a combined market share of 65% of the total cloud market as of Q1’23 data:
All 3 companies do not share the same fiscal year, so comparing their performances on an FY basis might cause some skew and bias.
Thankfully, as they all released their results around the same period, there could be some important insights when we compare their performances side by side. Let’s take a look!
However, there are still pinches of salt to be taken as Microsoft does not separately categorize Azure on its own but under the Intelligent Cloud umbrella. The Intelligent Cloud business segment comprises of its Microsoft’s Enterprise Services, Windows Server, and SQL Server revenue as well.
Cloud Revenue teardown: Who grew the most?
Not many people are aware that Microsoft’s Intelligent Cloud has been slowly stealing thunder from AWS.
By comparing the latest 5 rolling quarters, there were times when Microsoft’s Intelligent Cloud came neck in neck with AWS in terms of revenue generation. But for the past 5 quarters, Intelligent Cloud has always been edging out AWS.
If we look at revenue growth on a quarter-on-quarter basis, things become much clearer.
Intelligent Cloud and Google Cloud Platforms (GCP) have been showing better quarter-on-quarter growth rates versus AWS. GCP, the smallest among the 3, would be expected to experience a higher growth rate due to its smaller base, while in terms of size, Intelligent Cloud and AWS are much similar.
The fact that Intelligent Cloud is growing at a similar rate as GCP does make AWS’ growth rate looks a bit weak comparatively.
Operating Income Teardown
There are similar observations when we compare the operating income of all 3 cloud platforms.
AWS’ operating income is surprisingly not growing over the last 5 rolling quarters. Google Cloud Platforms (GCP) saw narrowing losses and broke into operating profitability in the last quarter.
The one that is seemingly growing is Microsoft’s Intelligent Cloud.
If we look at the operating margins of all 3 cloud providers, it is inherent to see AWS bucking the trend.
Intelligent Cloud’s margin is stable above 40%, while GCP has achieved successive 2 quarters of positive operating margin. AWS’ operating margin however has slid from almost 29% to 24.33% YoY.
How many pinches of salt should I take since Azure’s true revenue is hidden under Intelligent Cloud
Even though Azure’s true revenue is not published explicitly, there are reasons why it’s grouped under Intelligent Cloud.
The adoption of Azure will drive up server products and cloud services revenues in tandem. Thus, the notion is that if Intelligent Cloud does well, Azure should also be growing aggressively to contribute to the entire uplift of the Intelligent Cloud segment.
Should Amazon investors be wary?
Yes…and no. Here’s why.
While the bulk of Amazon’s revenue is derived from its e-commerce business, it is asset-intensive and has been back in the red for the last 4 quarters.
Amazon is still an e-commerce business
If you were to group Amazon by revenue, it is an e-commerce company. 85% of its revenue is via e-commerce in North America and internationally.
However, Amazon is profitable only due to the fact it has AWS. Although AWS is not exactly asset intensive, it commands a way better margin and cloud IaaS tends to be sticky.
AI could support AWS revenue
Although AWS’ margins deteriorating in the short term does not look good for the near term, the cloud catalyst might still have legs to run. Especially if we factor in the amount of data storage and analysis required for various AI workloads and autonomous machinery operations.
Not to forget that Amazon’s advertising business has generated more revenue than YouTube!
No one knows when the next AI sweeping change will come. Even Microsoft failed to present significant AI revenue contributions after making the headlines with its investments in OpenAI’s ChatGPT.
AWS would continue to be the most dominant cloud service provider due to its first-mover advantage. But Azure and GCP will always be nipping on their tail.
Microsoft and Alphabet, on the other hand, have other strong revenue verticals that complement their cloud businesses.
Any possibility for Microsoft or Google to usurp Amazon in the Cloud space?
Nothing is impossible, but it does require certain adverse events for AWS users to jump ship.
Cloud migration is painful and is seldom executed. Even at a consumer level, changing from iPhone to Android while trying to figure out porting your data, photos, and other stuff from iCloud to Google Drive is already nerve-wracking.
Plus, there are companies out there like Snowflake Inc (SNOW) and VMware, Inc. (VMW) offering multi-cloud and cross-cloud integration.
All 3 big tech companies are heavily vested in AI and also cybersecurity to make sure they continue growing their market share.
There could be a pivot (in the Cloud space) on the way
The more humans rely on computers and AI, the more work is delegated to our cloud service providers.
From film-developed photos to JPEGs stored in our personal cloud and a potential AI takeover, some may find their jobs rendered obsolete if AI is perfected to execute its deliverables with flying colors consistently.
It might be a future that is too scary to fathom. But one thing is for sure – the next cloud pivot will come together with the sweeping implementation and integration of next-generation AI.
Best cloud company to invest in?
All 3 companies are still crème de la crème for stable growth investing.
For me though, I enjoy having companies that own a multitude of cash-generating businesses, especially tech companies since this particular industry can be easily disrupted. Hence, my preferences lean more toward Microsoft and Alphabet.
I used to be a bit bearish on Amazon and still am based on the margin sliding for the past few quarters. Not to also mention that free cash flow is well below when compared against Microsoft and Alphabet.
But, if prices are right, I wouldn’t mind taking a bite at the stock!
