We thank the readers for their gratitude for the first article in this series. In addition, we will also highlight a few points based on the reader's questions and comments:
- This analysis is limited to the listed players in public ski spaces and does not extend to application companies. For example, Salesforce.com (NYSE: CRM) has a preferred partnership status with Amazon (NASDAQ: AMZN) Web Services (AWS) and Adobe (ADBE) running on Microsoft (NASDAQ: MSFT) Azure. While Salesforce's Sales Cloud and Adobe Experience Cloud are leading products, they are applications, and the underlying cloud belongs to public slide companies. Therefore, none of the application companies have been involved in this analysis.
- There have been some reading interests in cloud hardware companies. While some of them represent remarkable investment opportunities, some have been limited due to a number of factors, including cloud providers slowing down on spending. Furthermore, these "downstream" companies in the cloud chain (like application companies "upstream") guarantee a separate discussion.
- The more prominent foreign names in the public cloud market are those in China and possibly SAP (NYSE: SEVJE). With the Chinese companies, for example, take Alibaba (NYSE: BABA). The company caters to a Chinese audience. The size of Alibaba's cloud revenues was $ 2 billion last year, and in 9 months of this fiscal policy it had made $ 2.5 billion. In addition, the company's complex holding structure (read variable rate units etc), the role of Jack Ma (after leaving the pole position, but still a key figure in the arrangement of things and tendencies of philanthropy), the inherent risk of today's tariff war and a need for Understanding the state of the Chinese economy does not lend us an attractive look at Alibaba Cloud and other Chinese players at this time. In the case of SAP, the company is in an aggressive M&A mode to increase its cloud industry. Given the size of the players mentioned here and the risk in SAP's inorganic strategy, we would like to see the company perform on this market a few quarters before they dig deeper.
- Hybrid cloud management has become an important category in the cloud market, due to a mix of on-prem and cloud assets that companies have built over the years. Given that a large number of businesses still need to fully embrace the concept of cloud, it can be a bit early in the day to segregate the hybrid by category.
- Interestingly, only one (Microsoft) of the old guard who falls numbers in the top 3 in the cloud, while the other two (Amazon and Google) are relatively new players in a market that is the development of traditional storage and computing.
We begin by taking a step back to understanding which cloud really is and the implications of the growing need to adopt a cloud-centric approach.
Cloud refers to the outsourcing of storage and / or computing features by renting capacity from cloud providers. Cloud providers generally have a distributed presence, and storage or computing is delivered over the Internet to shoot customers.
Cloud was first considered an inexpensive means of testing the market for new products without worrying about capacity or cost constraints. Enter the test phase, customers get better visibility of requirements and can easily move from a public cloud to a private cloud (in a public cloud, the entire management of hosting is outsourced, which changes with a private cloud where the customer owns the responsibility of management and hosting) . Since in the longer term, renting is always more expensive than owning an asset, private clouds make greater sense for larger and more stable businesses looking to expand margins from cost-effectiveness rather than relying on revenue growth first.
Over the last decade, the IT department's reluctance to adopt the cloud has given way to extreme enthusiasm towards the cloud. While the first reluctance was due to the anticipated complexity of managing another element of the IT portfolio, the enthusiasm has been driven by expectations of enabling innovation while dramatically reducing costs. Over the last few quarters, both reasons have been converged to give rise to the multi-cloud paradise: The need to manage different cloud assets (acquired or housed), along with the subsequent complexity of dealing with them, has led to the rise of hybrid cloud administration solutions or system integration services for multiple clouds (private and / or public).
Another trend that has dominated the need for cloud is that of edge computing, driven by the Internet of Things (IoT) adoption. Edge computing refers to the processing of data closer to the edge (or to the nodes of the network, where the data is generated) as opposed to bringing the data to the cloud to process. Using edge calculation cases includes real-time decision making (games, autonomous vehicles, algorithmic trading, etc.), where even a slight delay in processing (due to sending data to the cloud and receiving processed information back) can have serious consequences. 1
VMware (NYSE: VMW) administration has been credited over the last several quarters for their prior knowledge of the growth of hybrid cloud and CEO, Patrick Gelsinger notes:
And the other thing I want to observe is that in the history of computing, Now this is my 39th year in technology, hard to say aloud, but we have seen the turn of technology forces from centralization to decentralization over the industry's history and the cloud will force centralization, edge and IoT to b e force of decentralization as we move forward and we do not see this world swing in any way.
Source: Barclays TMT Conference (Dec. 2018)
What confirms his view is the decline in cloud revenues over the last three to four quarters for most major players. While the causes vary, the underlying theme is that the investment has been cut down and now growth rates have started to moderate.
Source: Business ads and author estimates. Note: LQ refers to the last reported quarter; LQ-1 to a quarter before and LQ-4 to four quarters before
Interestingly, Oracle is just the vendor who has seen a steady increase in capex.
Source: Company registrations and author estimates
It seems that the broader market has decreased At least the last couple of quarters, possibly guilty vendors are gradually focusing on a hybrid cloud to grab the edge opportunity. In parallel, the guardians can also prepare for an expansion of the cloud to be a more standardized abstraction of owned and leased resources. Some vendors have invested in building assets, some players have chosen partnerships, and some have embarked on the more ambitious route to M & A.
Azure has fired all cylinders on the back of Microsoft's broad corporate reach and the company's own end-user programs are at the top of Microsoft's cloud. In addition to Office 365, games have become important to the company. Microsoft made over $ 10 billion in gaming revenue last year, which is ~ 10% of the company. And ~ 7% of the game market at $ 150 billion a year.
In March this year, Microsoft brought all its game development tools under the "Game Stack" umbrella and will host Azure. In addition to Microsoft trying to provide a complete toolkit for game developers, the company is also trying to address the most complex part of cloud gaming: latency issues. In early April this year, Microsoft also announced a partnership with Akamai (AKAM), a leading content provider (CDN).
Akamai is possibly one of the largest CDNs (or distributed networks) in the world and has been working on streaming companies for a long time, simplifying lower latencies in games and live sports streaming.
As recently as the end of April, Akamai management commented that while managing latency is possible, the problem is with economics in scale – a growing volume of traffic makes it a rather expensive proposition for it to be profitable for cloud games streaming. And yet, Microsoft has tied itself to Akamai.
Microsoft had introduced subscription to their gaming products for a while, recognizing a shift from one "per device to a per-user" model so users can consume games across devices (from consoles to mobiles). The management had also expressed willingness to invest in its gaming product to capture a larger share of the $ 150 billion betting market a year. In this context, the cooperation with Akamai appears to be an investment (although the economy currently doesn't make sense) for additional Microsoft and Azure edge capabilities.
In addition to Akamai's edge network, Microsoft now also has formal relations with VMware and Red Hat (NYSE: RHT) – IBM (NYSE: IBM) for hybrid functions. Cherry on the cake for Microsoft's cloud stack offerings is the fact that current CEO Satya Nadella was executive vice president of Microsoft's Cloud and Enterprise group before rising to the post of CEO.
Satya has been particularly vocal about Azures & # 39; architectural advantage & # 39; as the key to success. After a small portion of the wobble, a couple of quarters back, due to product shifts, the cloud industry seems to be in top form with revenue growth and margin expansion indicating stock gains.
Oracle (NYSE: ORCL)
Larry Ellison has overseen the company's cloud business after the end of Thomas Kurian, over reported differences around Oracle's strategy of selling his own cloud against making more of his software available over other public clouds. The significance of this performance can be considered from the following:
- he was uploaded by no one other than Google (NASDAQ: GOOG) to lead the Google cloud industry
- Thomas worked for over two decades on Oracle, which is rising through rankings and reporting to Larry
- Oracle had begun marketing his Gen 2 cloud over the last couple of years
Oracle claims from a market tank that Gen 2 is a better architecture since it separates cloud control from the user code, which makes it a safer and technologically superior efforts.
Source: 2018 Oracle Analyst Day
While Oracle's leading share in the database market has been claiming fame, its aggressive sales tactics have often been detrimental to the adoption of its Products. Orakels cloud is also quite new to the existing players. Despite these limitations, the company has tried to encourage its customers to transfer to their databases of the Gen 2 cloud.
But in terms of technology, there is no way anyone can move – a normal person would move from an Oracle database to an Amazon database. It's just incredibly expensive and complicated, and you have to be willing to give up tons of reliability, tons of security, tons of performance to continue and do. But we have a huge technological advantage. Again, don't believe me, read the Gartner report. We have never had – The Oracle Autonomous Database has the largest technology management ever in the database business from a technological point of view. The problem is that we have to deliver the autonomous database on first-class cloud infrastructure to succeed in the cloud industry. We need more than just a great database. We have the best database, but we also need first-class infrastructure to run the database. And we finally have it with our generation of two clouds, and I think you will see the combination of the Oracle Autonomous Database in the generation of two clouds.
Source: Q2 2019 Oracle Earnings Call
In particular, AWS still uses Oracle database products. Oracle also seems to have generated some buzz with its autonomous database.
The introduction of our genes 2 secure infrastructure with Oracle Autonome Database has been very well received. During the third quarter we had almost 1,000. Over 4000 active attempts.
20% of our customers at Autonomous Data Warehouse, Autonomous Database right now, are net new to Oracle. We didn't have them before.
Source: Q3 2019 Oracle Earnings Call
However, the decline in the company's older business has not allowed growth in the cloud industry to adequately reflect in the top line. Although margins have improved, a larger software component points to the revenue mix.
Source: Corporate deposits and author's estimates
Also remarkable are the many acquisitions made by the company in 2018 to increase its cloud function, especially on the AI side.
The purpose of producing more features in a cloud that can easily take care of a separate database seems to be the right move. The only hiccup is that the guy who heads these acquisitions is not with the company anymore. Thomas Kurian's departure also raises the question of whether 2019 may still be the year of bending for Oracle's cloud ambitions. There are two ways to think about this:
- When Larry Ellison referred to 2019 as the year of bending, he was still opposed to his boss's idea of making Oracle software available in other public clouds. Thus, with Thomas's departure, there was, in any case, limited opposition that the chairman faced, and now the bending months must be drawn forward. Or,
- Oracle expects the shielding to slow down with both sides coming to a midfield, which ultimately benefits the company.
The thing that goes against Larry is the market's long wait for Oracle to see growth driven by the cloud industry. However, the company has bought back many of its own shares. Also, not to mention, Larry Ellison has supported visionaries, including Steve Jobs in the past.
IBM is a bit of a unique case, given the portfolio breakdown that the company has witnessed. IBM seems to have happened between an operator and a challenger, and finally, as a major player in the cloud integration (hybrid cloud space), it still wants to sell some of its own cloud. IBM shocked the markets last October with the announcement of its Red Hat deal. The surprise was more to do with the size of the deal that IBM was committed to and for assets that the company purchased.
Cognitive solutions were IBM's brightness; With the Red Hat acquisition, IBM became more prominent in the hybrid cloud market. By acknowledging the importance of keeping the technology service business separate from its core business, IBM had moved its core technology services business and gathered it with the "Cognitive Solutions" business. The combination of cognitive and cloud will probably help IBM produce much of its technological excellence in its own cloud. Factors that favor IBM's position in the evolving cloud market are:
- The company's long history of business relationships (which is extremely critical for raising the cloud and associated SI work), especially since IBM helps the customer their challenge beyond that of "low hanging fruit "of skymigrations.
- IBM's cloud engagement (the Red Hat acquisition is by far one of the biggest technology deals) seems to be quite serious and in line with what a company sees to reinvent itself.
Some aspects that are also likely to contribute to IBM's position in the overall cloud screen are:
- The Red Hat acquisition is likely to outweigh IBM's business model from a large, legacy, software, hardware, and services firm to one. lighter cloud and inheritance solutions provider. The changes in the business model will probably also necessitate changes in the management level to keep the torque intact. When the printer writes this article, Arvind Krishna, a three-year-old IBM veteran, Cloud and Cognitive Software, heads. With a cue from Microsoft's history, IBM can significantly strengthen its position in the cloud / hybrid space, if the cloud leader also leads the broader portfolio of the company's assets to better adapt to the overall corporate philosophy. Ginni Romette's absence from the last couple of income talks can only be the first hint of an imminent change. But management clarity will be crucial for IBM to be able to convince customers of the company's technology vision of being a marathon rather than a sprint.
- With the Red Hat acquisition, IBM has targeted the $ 1 trillion hybrid cloud market and it may make sense not to compete with the big public cloud players. But as the world is becoming increasingly clouded, customers have tried to avoid vendor locking. IBM's cloud is an excellent option for customers who want to increase the diversification of their underlying asset base while trusting IBM with the abstraction to be delivered (hybrid management), to ensure standardization and smooth operation. However, to adopt this strategy, management may need to improve the message and avoid overcoming as a competitor who aims to become one of the top three in the public cloud supplier market.
Since the first half of last year, IBM's management had attempted to build a narrative about the potential of its hybrid cloud strategy. Afterwards, while the core block business may have slowed down slightly, the SI orders have been quite strong. Expected closure of the Red Hat deal in the second half of this year, and IBM's cloud strategy reports, could potentially make IBM stand out in the hybrid slider.
If it is a sweet place for hybrid cloud management, VMware is in it. The company is a renowned leader in virtual hardware and has increasingly been associated with software for managing private clouds.
A few quarters back, VMware had begun to see traction in the partnership with the AWS.
We continue to see customers' interest and commitment with VMware Cloud on AWS. Designed to bring VMware software-defined data center to the AWS Cloud, the service enables users to run applications on operationally consistent VMware-vSphere-based private, public and hybrid cloud environments, with optimum access to AWS services.
Source: Q4 2018 VMware Earnings Call
In contrast to AWS gaining access to VMware's customer base, VMware gained a marginal benefit from not having to host.
We also see that, given that it is a subscription business, it will also delay direct fiscal impact. As we said before, there is a networking business for us. So we do not bear the costs of hosting via our P&L. So it gives us a pure subscription license business to us.
Source: Q4 2018 VMware Earnings Call
Over the past year, this focused on AWS and potentially IBM's proximity to Red Hat that AWS displaced IBM's key role in the VMware Partner Program (VCPP). VMware's goal was to develop rather than sell AWS to its own customer base and beyond to grow this business further.
We basically sell to existing installed based VMware customers as a starting point, but we expect clearly when we go to phase 2 and beyond
Source: Q2 2019 VMware Earnings Call
And the first start of phase 2 looks appears to be the launch of AWS Outposts.
In addition to the AWS partnership that opens the possibility of a healthy margin growth for VMware, VMware's dominant position in the hypervisor area will also dictate similar partnerships for other players to survive and grow. In part, VMware and the AWS relationship may have inspired the IBM Red Hat agreement.
Where VMware also scores, it is the relationship with almost all major players. In a world where several cloud environments become the norm, VMware partners provide network of over 4,000 skippers VMware pole position. Also worth noting the benefits that these conditions could potentially bring to Dell, VMware's parent, and quite influential.
Although there is no doubt that VMware's role in the hybrid cloud market is likely to shape the market to a large extent, its proximity to AWS may cause some friction over other cloud majors.
AWS may not have the best technology branch, but the Amazon's customer centric has enabled AWS not only to lead the public cloud market, but also to finance Amazon's consumer business. Interestingly, Amazon's consumer business is known to be AWS & # 39; largest customers.
AWS's VMware partnership is potentially an investment for Amazon with the potential for a much higher return. AWS does not need to educate customers about the benefits of the cloud anymore. Instead, the company needs to cope with costs in order to grow margins while reducing costs (something that AWS has done with virtually clockless efficiency). AWS & # 39; announcements about deep storage, concurrency, etc. Pointing out that the company has reached a point where the marginal cost of incremental computing and storage has become minimal. Thus, the fall of the Amazon capex falls well as the company attempts to gain access to private ski space with VMware: AWS needs to be hosted and the company has brought the cost of hosting. Given that VMware claims to have hundreds of thousands of customers if AWS continues to play well, it is possible to continue milking private and hybrid cloud markets.
Although AWS's continued investment in research and partnerships is likely to help maintain the company's competitive moat in the cloud industry, the risk is more inward.
- Amazon's entry in many related fields has led many of AWS & # 39; customers to see AWS as part of a competitor. Anecdotal evidence suggests that Microsoft may have benefited in some cases. If Amazon continues to expand into newer business areas, competitors can take advantage of offsets because of competitive Amazon threats that have access to customer data.
- AWS has become quite large, and as the hybrid cloud market continues to shape, companies see alternative suppliers in their portfolio to secure their risks.
- While AWS & # 39; the focus on a partnership-driven model has enabled capex to remain low, growth rates in recent quarters have been moderate. The reduction in prices has also affected margins. More recently, management noted sequential weakness due to lumpiness in the business. Whether AWS takes on massive (by AWS standards) transformation projects that cause lumpiness or the benefits of frontloading capex investments in 2016-17, is beginning to decline. In both cases, AWS would not want to cite much market share to its competitors, as the cloud was ultimately a scale.
Google Cloud Platform (NYSE: GCP)
Apart from the usual rambles of technological superiority, relative lack of customer focus in their business versus other cloud players and disappointment in the management over their impenetrability around the size of their cloud industry, GCP must Also be seen as a progressive business.
- GCP has come a long way from selling its product to customers with tagline & # 39; running as Google & # 39; to make a joint effort to make Google Cloud supplies for their corporate users. What is commendable about Google's efforts is that the GCP was built for developers to develop software on it and not for businesses to migrate older workloads, and still the company has won large corporate customers. Furthermore, GCP has launched new products to meet where the customer is. For example, the company launched an identity management tool, which Googlers might consider to be boring, but is a necessary requirement for conventional businesses.
- Google's appointment of Thomas Kurian was no less an event than IBM's Red Hat deal.
- Apart from Thomas Kurian's proximity to Larry Ellison at Oracle, Thomas is also an outsider for Google (not just from a corporate perspective but also from a cultural perspective). Satya Nadella from Microsoft, Arvind Krishna from IBM, Patrick Gelsinger from VMware and Andy Jassy from AWS (and even Sundar Pichai from Google) are all company veterans who rose through the ranks. It also did Thomas Kurian, at Oracle. Another green issue for the corporate product manager will be how well he can destroy the stereotype of "home-grown directors doing well" in one of the world's most engineering-focused companies in one of the company's fastest growing businesses.
- Much of the criticism faced by Google for not providing enterprise-grade support to its cloud customer stemmed from the fact that Google had repurposed its own cloud to sell beyond. Thomas Kurian was the head of the cloud on Oracle, whose Gen 2 cloud has been re-architected to go beyond the traditional cloud approach. Thus, one of the issues facing the new CEO is likely to be: While he has experience seeing the Gen 2 cloud evolve, he can add enough bells and whistles to Google's existing cloud product to make it easily accessible to the elderly / conventional business needs?
- The change of GCP's operational focus from encoders to companies can also pose a potential challenge for the company. AWS & # 39; success was because the company's cloud was tailored to help businesses and AWS spend significant efforts to educate audiences on the benefits of cloud to customer's on-premise solutions. The GCP can only lie behind the curve. In the early days of the cloud, businesses wanted a hands-free approach to migration. Over the years, as people have understood the cloud better, it's not just coded drive (which was driven to the GCP because of the coder-friendly offer), but also the company's IT managers have begun to appreciate GCP. But selling the product to CIO versus CEO is two different aspects, and Thomas Kurian will go a tight rope that balances these two, often conflicting requirements.
- The launch of Stadia, a shooter service, is another move from Google to melt the boundaries of business and consumer industry. What goes well for Stadia is that it has significant integration with YouTube, where over 201000000 hours of game content was seen in 2018. There are potentially two challenges that Stadia can face:
- The first concerns the technical barriers that arise from streaming HD graphics with low latency requirements, and also on a scale. In terms of movie or video streaming, where local units can store the data, the latency of the game becomes much more important since players are waiting to react to their opponent's next move.
- The second challenge is more subtle but likely to be just as important. The stage will also be a test of how well Google has learned from the mistakes made while selling their cloud. The stage is based on Google's cloud and CDN, which in a way is the repetition of how the company first started selling its cloud business – an internal resource that was opened to mass consumption. Of course, people who work with Stadia are much closer to coding than IT managers early in the beginning of public cloud sales were. Although Stadia's customers are looking for latency and economy, which has been structurally challenging for cloud gaming, Google's addressal of these aspects will be an important thing to be looked at.
The cloud market has been characterized by a myriad of changes across companies and managers, aimed at increasing share. Hybrid and Edge appear to be the new pursuit of worthy goals, with investments ranging from acquisitions to partnerships. The staple to get a piece of the existing on-prem installed base is inevitably ready.
As we move on to the third part of this series, the Masters of Cloud invites: A dark horse, readers to help us distil through the companies being discussed . Based on our research and user comments, we aim to identify stocks that can provide the best possible return with the lowest risk.
Notice: I / We have no posts in any of the aforementioned shares and no plans to start any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I do not receive compensation for it (other than from Seeking Alpha). I have no business relationship with a company whose stock is mentioned in this article.