Global cloud infrastructure services revenue grew 24% in the third quarter of 2022 to a whopping $57 billion. Factoring out currency effects from the strong US dollar, growth was even 30%. The headwind from recession concerns, high inflation and restrictions in China is obviously not having a negative impact. Nevertheless, the share prices of many cloud providers have fallen sharply. Are there any opportunities here for long-term investors?
First, let’s look at reasons for the ever-increasing demand for cloud infrastructure. This infrastructure consists of hardware and software and is rented out to customers. The customer can then store data in the cloud and host services and applications there.
The more data is in the cloud or is brought into it, the greater the demand for cloud infrastructure. And this data volume is constantly increasing for various reasons. Whether I’m watching Netflix , scrolling through Instagram, or playing video games, it’s all on the cloud.
However, an even greater growth driver seems to me to be the demand from companies. While these often operated their own data centers in the past, more and more companies are moving their data, as well as applications and processes, to the cloud. According to a Statista survey, 84% of German companies are already using cloud computing. Advantages include reduced administration effort, higher data security and more flexible access to IT resources.
Accordingly, the market for cloud infrastructure should continue to grow strongly in the future. Precedence Research expects a compound annual growth rate of 17% until 2030.
How can we as investors benefit from this expected growth? That’s easy. The cloud computing market is dominated by three companies: Amazon (NASDAQ:AMZN:906866), Microsoft (NASDAQ:MSFT), and Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOGL).
|cloud provider||Amazon (AWS)||Microsoft (Azure)||Alphabet (Google Cloud)|
Respective market shares in the third quarter of 2022. Source: Synergy Research Group
Together they had a global market share of 66% last quarter. A year ago, this proportion was still 61%. So it’s not surprising that Apple and YouTube, for example, use the Google Cloud. Netflix, Instagram, Disney+ and the US government trust Amazon’s AWS. And companies like eBay , Bosch and BMW rely on Microsoft’s Azure Cloud.
I have no doubt that the cloud infrastructure market will continue to grow for a long time. The three big US tech companies seem excellently positioned to benefit from this. These do not rest on their laurels, but are constantly developing their services further. Their sheer size and financial strength stand them in good stead.
For example, Alphabet can afford to lose big on its Google Cloud for years to fuel growth (revenue grew 38% last quarter). At some point they can hopefully flip the switch to become as profitable as the first mover and market leader AWS. The cloud division has generated more than 50% of Amazon’s profits for years. In 2021, while AWS accounted for just 13% of Amazon’s sales, it contributed 74% of its profits.
So offering cloud infrastructure can be extremely profitable. After all, the marginal costs are very low and the revenues are usually recurring. In addition, I see potential among the providers of modern data infrastructure to advance further into related areas such as data security or reporting. I find all three stocks attractive.
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