Which Cloud Computing Stock Should We Buy
Don’t Listen To Me, But Please, Hear Me Out: # 23
Shaheeda Abdul Kader, November 11 2020
There will be 175 zettabytes of data by 2025.Microsoft Shareholder Letter, Oct 2020
Ever since Snowflake Computing, $SNOW’s jaw dropping IPO pop of 104%, I have been in FOMO mode. I want to pick at least 1 stock in Cloud Computing Services, IAAS (Infrastructure As A Service), or PAAS (Platform As a Service), that will give me the best returns. Here’s what I did and where I will put my $10.
Spending on cloud environments, including public and private, increased 34.4% from a year ago. Non-cloud IT spending fell 8.ZDNET
Why Cloud Computing Stocks?
Even though tech stocks took a bit of beating in the last few days, I am still long on tech stocks. People, Organizations and Enterprises will still need many technology services and upgrades. Remote working is here to stay, and Cloud Computing Services are critical for Remote work. It will be a good two years before we can inoculate everyone with a vaccine against Covid19. In this period, lot of the working environment changes we have adapted to will become permanent.
Microsoft, Google, Twitter, AirBNB, American Express, Uber etc have all extended or made some jobs permanently remote work.
Additionally, the need to manage, process, and analyze terabytes of data is only increasing especially with the race to conquer AI and ML. Cloud computing is essential for this as it can offer rapid, secure scaling at low costs.
Great, so how big can this industry grow to?
Cloud Computing Industry to Grow from $371.4 Billion in 2020 to $832.1 Billion by 2025, at a CAGR of 17.5%.Research and Markets, Aug 2020
The worldwide public cloud services market is forecast to grow 6.3% in 2020 to total $257.9 billion, up from $242.7 billion in 2019, according to Gartner, Inc. Desktop as a service (DaaS) is expected to have the most significant growth in 2020, increasing 95.4% to $1.2 billion. .Gartner
The infrastructure as a service (IaaS) market size was valued at USD 38.94 Billion in 2019 and is projected to reach USD 201.83 Billion by 2027, growing at a CAGR of 23.2% from 2020 to 2027.Cision PR Newswire
Confused? Me too. There are so many figures and definitions.
What The Falafel IS Cloud Computing?
I found two useful definitions.
- ZDNET defines “Cloud computing is the delivery of on-demand computing services — from applications to storage and processing power — typically over the internet and on a pay-as-you-go basis.”
- According to Golden.com, Cloud computing is a “Form of internet-based computing that provides shared computer processing resources and data to computers and other devices on demand.”
Ok, so that makes sense. All of us probably use some sort of Cloud Service. Instead of spending twice as much for a 512 GB iPhone, we can buy the cheaper 64 GB phone and pay for iCloud subscription at $1.99 – $2.99 a month. Most of us are familiar with Cloud Storage Services like Google Drive, Drop Box, iCloud, OneDrive etc.
But there is a lot more to Cloud Computing. Especially with the proliferation of Data Science, Big Data, IoT, AR, VR etc, everyone wants more and more data processing, data management, data warehousing and data analytical computing power.
So, the good news is, the pie is really large. So everyone can enjoy a healthy share of the pie, and grow profitably.
The bad news is that the pie is really large and therefore many players will enter the market. This can lead to market fragmentation and confuse both investors and customers.
Another important point is that from my limited analysis, I do not see any single player that is on top for every single aspect of cloud computing.
What Are Cloud Computing Services?
I found this great table from Gartner and it explains it best. Column 1 in the table shows all the various cloud computing services. Software as a Service (SaaS) is by far the largest segment. Cloud System Infrastructure is where Amazon’s AWS (Amazon Web Services), Microsoft’s Azure and Google’s GCP (Google Cloud Platform) fit in. However, Azure and GCP also provide additional cloud computing services.
|Worldwide Public Cloud Service Revenue Forecast (Millions of U.S. Dollars)||2019||2020||2021||2022|
|Cloud Business Process Services (BPaaS)||45,212||43,438||46,287||49,509|
|Cloud Application Infrastructure Services (PaaS)||37,512||43,498||57,337||72,022|
|Cloud Application Services (SaaS)||102,064||104,672||120,990||140,629|
|Cloud Management and Security Services||12,836||14,663||16,089||18,387|
|Cloud System Infrastructure Services (IaaS)||44,457||50,393||64,294||80,980|
|Desktop as a Service (DaaS)||616||1,203||1,951||2,535|
Who Is Leading And Who Is Catching Up?
Amazon is by far the leader and have he’d a significant marketshare for over 10 years. However, Microsoft, Google and others are quickly chipping away at AWS’s position. Moreover, the big players seem to be consolidating their position. Here’s another neat table I’ve adapted from Gartner.
|Company||2019 Revenue in Billion||2019 Market Share||2018 Market Share|
As of November 2020:
- Amazon’s AWS revenue was $46 B, growing 29%
- Microsoft’s Azure revenue was $26 B, growing 48%
- Google’s GCP revenue was $9 B, growing a hefty 70%
All the analysts were hemming and hawing because AWS’s growth slowed from 30% last year to 29% this year. As with everything, we must look at the denominator. At is much easier to double $1 to $2 than $1 B to $2 Billion. I am not writing off AWS because of this. They still control over 40% of the market.
So Whom Should We Bet On?
You know me, I don’t do any investment decision without first reviewing the financial statements. I’m not going to bore with more numbers except these (Read my posts on reading financial statements here):
- AWS Operating Margin: 29.5% (Amazon Financial Statements)
- Azure Operating Margin: 38% (Microsoft Financial Statements)
- GCP Applied Technologies net profit margin as of September 30, 2020 is 11.42%. (MacroTrends)
I am not focusing on Ali Baba or Tencent in this blog because Chinese Regulators and Tech Companies seem to be going through a turmoil at the moment. So I am staying away until the dust settles.
Coming back to the big 3, Bezos famously said that “Your margin is my opportunity.” Microsoft enjoys a really nice Marin and I am sure Amazon won’t hesitate to spend their way into maintaining or increasing their pole position. Google has a lo margin now because they were late to the game and are spending heavily on building out their infrastructure.
The balance sheet and financials look good for all three, except Amazon’s overall margin of 6% always made me uneasy.
What About Snowflake?
Well, Snowflake or $SNOW is what got me excited about this market to begin with. I have read almost every single page of SNOW’s S1 filing. SNOW uses AWS for its public cloud platform services. So why don’t I just buy more Amazon?
Not so fast.
SNOW is in the Data Warehouse and Data Management Solution Space. According to Gartner Magic Quadrant, SNOW is a leader and visionary, but still below both Amazon and Microsoft. In fact, Oracle leads here.
So, I studied as many of these Gartner Magic Quadrants as I could find. It was confusing at first, but I learned a lot by the end of it. For example, IBM featured in many of these services. I won’t inundate you with all the details, but you can find them under “Resources” section at the bottom of the blog.
I started plotting how many times AWS, Azure, IBM, GCP, Snow etc., came in the Gartner Magic Quadrant based on various service offerings. Microsoft leads hands down.
|Cloud Computing Service||Quadrant||Rank|
|Cloud Infrastructure Web Service||Magic||1|
|Data Management Solution||Magic||2|
|Analytics & Business Intelligence||Magic||1|
|Unified EndPoint Management||Magic||1|
|Data Integration Tools||Challenger||1 (Among Challengers)|
|Data Science & Machine Learning||Visionary||1 (Among Visionaries)|
Moreover, Microsoft have invested in and integrated Databricks, a Cloud Service Platform for Data Science and Machine Learning. Databricks plans to IPO in 2021 and is currently valued at $6.2 Billion has raised $897 M in venture funding.
- Enduring Enterprise Relationships:
- Microsoft has deep understanding and long relationships with Enterprise Customers through its many service offerings.
- Rundle Experts:
- A Recurring Revenue Bundle Services or Rundle, a phrase Prof. Scott Galloway coined. Microsoft are masters of bundling their services, quietly “ch-ching” its cash tillers with uninterrupted monthly cash flows. They will continue to leverage their existing enterprise relationships and rundle.
- One Stop Shop:
- Although there is not a single player in cloud services who can provide all the services a customer needs, Microsoft is certainly the one that offers most of those services fairly well as we saw from Table 3 above.
- Microsoft Consulting Services:
- Microsoft have dedicated Consulting Services catering to both small businesses and enterprises. Additionally, they have good relationships with systems integrators like PWC, EY, Deloitte etc, who are critical in making package recommendations to customers.
Before we make our final decision, let us have a quick glance at each company’s stock performance
Pictures speak 1000 words. Here is the YTD, 1-Year, 3-Year, 5-Year and 10-Year stock performance as of November 11 2020.
Investing in IBM any time over the last 10 years would have been a terrible mistake. Microsoft and Amazon’s performance was almost the same in the 3 and 5-year periods. It is good to see Alphabet (Googl), show a little more momentum in the past year. Covid19 however boosted Amazon the most in 2020.
$10,000 invested in each of the 4 companies in 2015, or 5 years ago would be:
- Amazon: $47,232
- Microsoft: $45,069
- Google: $23,283
- IBM: $10,899
As for SNOW, although it had a great IPO, I am wondering if the investors who backed the company Pre-IPO have not already scooped up all the gains at least for the short term (1 year). I will make a decision after they post earnings for their first 2 quarters. It is not profitable yet. I need to make sure that it is definitely on the way to profitability.
When it comes to Cloud Computing and related services, Microsoft seems to have more of an advantage because they are a pure technology company. Their Operating Margin is an enviable 37%, whereas Amazon’s is about 6%.
However, comparing apples to apples, AWS has a margin of 30% and Azure (Intelligent cloud), enjoys a higher margin of 38%.
I believe Microsoft has the ability to catch up to Amazon. However, I would not discount Amazon because they are heavily investing to increase its cloud infrastructure.
In the past 10 years, Amazon has consistently beaten Microsoft in stock performance.
I own Amazon, Microsoft and Google stocks. I will increase my position in Microsoft. It is trading at 34 times earnings whereas Amazon is trading at almost 89 times earnings. So, Microsoft is comparably cheaper although at the moment both are rather pricey. I will wait till the US election drama settles to make my move.
You can find a list of articles and resources I referred to here.
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I am NOT a certified broker or financial advisor. Please DO NOT make investment decisions based solely on my blogs. My intention is to show you how to research stocks or funds for yourself so you can feel empowered and knowledgeable to do your own investigations and invest with confidence. It is best to consult with your broker or advisor if you have questions. You can also reach me and I’ll do my best to help you with your queries.