The onset of COVID-19 has accelerated the digitization of the global economy. During the early days of the pandemic, it became clear that people would need to stay at home in many instances to do their jobs. The change in working environments quickly led to a shift amongst companies to provide customers with cloud-based applications that would allow them to do their work in several different settings. Cloud-based operating models are expected to continue to rise at a double-digit pace, according to Gartner. This increase will help propel the revenue and earnings of cloud-based giants such as Microsoft, Alphabet, and Amazon.
New Cloud-Based Operating Models
Organizations embracing dynamic, cloud-based operating models are prepared for increased competitiveness. These organizations recognize the short-term benefits of the cloud and position themselves to be early adopters of the disruptive innovations that will generate new products and services in the future. Recent innovations in artificial intelligence are tied to a cloud foundation as part of an organization's digital business technology platform.
According to Gartner, by 2024, more than 45% of IT spending on system infrastructure, infrastructure software, application software, and business processes will shift from traditional solutions to the cloud. This evolution makes cloud computing an essential disruptive force in IT markets since the early days of the digital age. Gartner IT spending forecast shows that spending on cloud data center systems is projected to be $188 billion in 2020. Spending on cloud system infrastructure services is expected to grow from $44 billion in 2019 to $63 billion in 2020, reaching $81 billion by 2022.
Cloud Bolsters Earnings
Cloud-based earnings have been helping to drive profits. Microsoft Corp reported its Azure cloud computing services grew 50% in the second quarter.Microsoft executives said they expect a midpoint of $14.83 billion in revenue from the company's Intelligent Cloud segment for the fiscal third quarter. For the company's productivity segment, including its computing cloud segment, sales are expected to have a respective midpoint of $13.48 billion and $12.50 billion, compared with estimates of $12.90 billion and $11.60 billion.
Microsoft said revenue in its Intelligent Cloud segment rose 23% to $14.6 billion, with 50% growth in Azure. Commercial cloud gross margins were 71% in the quarter, compared with 67% a year earlier.
Microsoft was not the only company that hit the cover off the ball when it comes to cloud computing. Its chief rival in the space also outperformed. Amazon's cloud-computing business reported 28% revenue growth in the fourth quarter. Amazon Web Services remains the market leader for cloud computing and storage that companies. Governments and schools use it to run websites and applications. While Microsoft and Google grew faster in the fourth quarter, they're still well behind Amazon in serving businesses that are rapidly offloading their data.
A year earlier, revenue at AWS climbed to $12.7 billion from $9.95 billion. AWS revenue represented 10% of Amazon's total sales. AWS continued to drive much of Amazon's profit. Operating income increased 37% from a year earlier to $3.56 billion. That means 52% of the company's operating income can be attributed to AWS, compared with about two-thirds in the same period a year ago.
Alphabet Relies on Ads Not Cloud
Alphabet also reported stellar growth in its cloud business. Google Cloud is now approaching a $16 billion annual revenue run rate. Unfortunately, it is not as profitable as Amazon or Microsoft in this space. During its earnings call, Alphabet detailed how much its ad business subsidizes its cloud expansion. In the fourth quarter, Google Cloud delivered an operating loss of $1.24 billion on revenue of $3.83 billion, up from $2.61 billion a year ago. Comparing cloud giants show a different orientation and business model. Amazon looks to AWS to boost the profit margins in e-commerce. Google Cloud is taking its ad business to get into the cloud.
Google's Cloud unit is where it is making its capital investment. Data centers are costly, and Google Cloud launched four new regions in 2020 and started work on others. That's on top of its investment in its core services and several acquisitions.
The Bottom Line
The cloud business continues to drive investment and produce revenues. Microsoft and Amazon are the key leaders in the space, but it is clear that Alphabet is making a significant investment and plans to take market share. The spread of the COVID-19 pandemic has accelerated the global economy's digitization, creating cloud services a crucial part of work at home and new working settings. Companies like Gartner continue to see further upside in the cloud space during the next 3-years.
Published by Samantha Brown