Can Microsoft or IBM Catch Amazon.com in the Cloud?
Amazon is the unquestioned leader in cloud infrastructure, and aggressive marketing tactics, discounting, and new product offerings weren't helping its competitors gain ground. Yet, as investors grow accustomed to Amazon's dominance in this space, two companies are now gaining ground, Microsoft , and to a lesser degree, IBM .
The one dominant company in cloud
The cloud is a fast-growing segment of technology that dozens of companies are trying to penetrate. It is broken down into two segments, cloud infrastructure, or laaS, and app platforms, or PaaS. Combined, this market is growing at an annual rate of 50%, and at the end of the first quarter, it had created revenue of $12 billion during the last 12 months.
Currently, this market is highly fragmented, with dozens of technology companies having a presence of some sort. However, Amazon's Web Services, or AWS, is the one dominant company, owning a 30% market share and creating well more than $1 billion in revenue per quarter.
Despite Amazon's industry-leading market share, it's actually growing its share even larger, quarter after quarter. Specifically, in the fourth quarter of 2013 and first of 2014, the cloud market grew an average of 51%, but AWS grew by 65% and 67%, respectively, implying that its market share continues to grow.
Two companies rising fast
With AWS continuing to outperform the overall cloud industry, investors might assume that it's simply creating more separation from big tech companies that have made large investments in this space. While this assumption is in large part accurate, Microsoft and IBM are gaining ground on AWS.
Microsoft and IBM nearly doubled their revenues within this space during the fourth quarter. In the first quarter, Microsoft and IBM saw year-over-year growth of 154% and 80%, respectively. , This shows that both companies are gaining market share even faster than AWS, and that recent initiatives are paying off.
Microsoft, which owns less than a 9% market share, has rolled out countless new features on two different occasions in the last few months for Azure. Like other cloud services, Microsoft has also significantly cut its prices -- to the tune of 30% plus -- clearly showing that gaining share is most important to the company.
On the other hand, IBM has boosted its service offerings via a number of high-profile acquisitions over the last four years. The latest acquisition came in April with Silverpop, a developer of cloud-based marketing automation software. IBM is making smart buys in companies that are also growing organically.
What's all this mean to for stock prices?
Cloud services is an industry that's growing, one that could easily create tens of billions in annual revenue within the next few years. Becoming a leader is very important for these noted companies.
Right now, with a 30% market share, AWS is worth $50 billion, according to Evercore estimates. AWS accounts for only 6% of revenue, yet because of growth, it is worth 35% of the company. For IBM and Microsoft, cloud services are an even smaller piece of their business pie, but likely valuable.
IBM's segment that includes businesses aside from laaS and PaaS is growing 50% annually and is on a $2.3 billion revenue run rate. However, this accounts for only 3% of total revenue in a company that is seeing overall revenue declines.
We're discussing segments that are marginal in relation to the total businesses of these three companies, but carry large market valuations due to their growth. It's worth noting that Microsoft has added $25 billion to its market cap in 2014, while IBM has grown $7.5 billion despite fundamental losses. One could argue that these gains are due to accelerated growth in the cloud, which could remain if IBM and Microsoft can continue to steal market share.
Microsoft and IBM have a long way to go before catching Amazon, but the important lesson for investors is that big investments are paying off for Microsoft and IBM. As a result, and with this industry's growth expected to last, it might not be long before the two companies' cloud businesses are worth $50 billion or more, which could create substantial shareholder value.
As for Amazon, it still remains the best pure investment on cloud growth. So while it's not growing at the same rate of Microsoft and IBM, it's still impressive. With the stock down 25% from its high, AWS is becoming a larger part of the investment story. It's an asset that will likely become even more valuable in the coming years.
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The article Can Microsoft or IBM Catch Amazon.com in the Cloud? originally appeared on Fool.com.Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com, International Business Machines, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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