Can Microsoft or IBM Catch in the Cloud?

Amazon (NASDAQ: AMZN  ) 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 (NASDAQ: MSFT  ) , and to a lesser degree, IBM (NYSE: 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.

Final thoughts
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.

Your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

Read/Post Comments (1) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 16, 2014, at 11:53 AM, rodgerreno wrote:

    so what does 12 billion mean to companies like Microsoft,ibm,and amazon???I have to say that this is a very small pie so far. any way there is no money to be made in the infrastructure side of the cloud. zero, it is a add on to services. it is actually a loss. I can never seem to find the numbers for amazon as to what part of their business cloud represents===I think it is less than 5%.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2959327, ~/Articles/ArticleHandler.aspx, 8/31/2015 3:47:44 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

Today's Market

updated Moments ago Sponsored by:
DOW 16,525.99 -117.02 -0.70%
S&P 500 1,974.76 -14.11 -0.71%
NASD 4,773.38 -54.95 -1.14%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/31/2015 3:31 PM
AMZN $512.13 Down -5.89 -1.14% CAPS Rating: ***
IBM $147.74 Down -0.24 -0.16%
International Busi… CAPS Rating: ****
MSFT $43.48 Down -0.45 -1.02%
Microsoft CAPS Rating: ***