Should Amazon.com, Inc. Investors Fear IBM and Microsoft?

Since inception, Amazon.com's (NASDAQ: AMZN  ) Web Services, or AWS, has been untouchable as the leader in cloud infrastructure, or laaS, and app platforms, or PaaS, otherwise known as the cloud. Synergy Research estimates that 12-month revenue now amounts to $12 billion for cloud infrastructure service companies. While this has become a valuable asset for Amazon, recent earnings reports from both Microsoft  (NASDAQ: MSFT  ) and International Business Machines (NYSE: IBM  ) confirm a rather interesting trend looking ahead.

What happened in Q1?
Looking back to the first quarter, revenue in the cloud industry surpassed $3.5 billion. Amazon's 30% market share meant quarterly revenue exceeded $1 billion, and a revenue-run rate north of $4 billion.

In the past, cloud services have always grown rapidly from a revenue perspective, but AWS' sales have always far exceeded the broader industry. The same applied during the first quarter, as AWS' revenue soared 67%, and because of this growth, Evercore valued Amazon's asset at a whopping $50 billion.

With that said, another startling statistic from the first quarter is that Microsoft and IBM saw their cloud segments grow 154% and 80%, respectively, year over year. While both companies finished with a market share between 6%-8%, the key is that accelerated growth implies that both companies are stealing share in the cloud and gaining ground on AWS.

Notably, with AWS outperforming the broader industry, IBM and Microsoft's strong performance means stolen market share occurred in smaller competitors.

A reason for Amazon concern
Amazon hasn't yet reported its second-quarter earnings. Therefore, we don't know how its AWS asset performed. However, both IBM and Microsoft have reported for the quarter, and their results confirmed what many might have thought following the first quarter.

For Microsoft, its Office 365 and Azure platforms both saw sales growth over 100%. While the company didn't provide specifics, we already know its cloud infrastructure business created nearly $300 million in the first quarter.

As for IBM, its cloud business is now on a revenue run-rate of $2.8 billion, up from the first quarter's $2.3 billion. Importantly, this includes some smaller businesses outside of laaS and PaaS, but is made up primarily of these two key segments.

With IBM's first-quarter laaS and PaaS revenue topping $230 million, alongside a $500 million increase to its run-rate, we can assume accelerated growth in the second quarter. Like Microsoft, IBM noted that this business' run-rate has increased more than 100% over last year.

A reason for optimism
While $300 million in quarterly revenue may seem insignificant for companies the size of Microsoft and IBM, cloud infrastructure's growth makes it highly valuable as a percentage of market capitalizations. Furthermore, investors are betting on future growth, not necessarily current fundamentals.

Therefore, investors should be very optimistic with IBM and Microsoft, as each company saw phenomenal growth in their first quarters. Perhaps this proves that, as the industry itself grows larger, Microsoft and IBM have established themselves as No. 2 and No. 3.

Foolish thoughts
Microsoft and IBM's growth should be a bit scary to Amazon investors. AWS is less than 5% of the company's 12-month sales, but according to Evercore, is responsible for more than 30% of its valuation.

Albeit, the biggest question looking ahead is where that stolen market share from IBM and Microsoft is occurring? In the first quarter, it was from smaller names, but during the second, it might have very well been Amazon. With all things considered, market share and growth will be important for investors to monitor over the next year or so, as it's very possible that shifts will occur and other cloud businesses will become worth $50 billion-plus, which will drive stock performance.

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  • Report this Comment On July 24, 2014, at 7:56 PM, Momintn wrote:

    In the 2Q earnings press release, it says "For cloud delivered as a service, second-quarter annual run rate up nearly 100 percent to $2.8 billion year-to-year. " I do not understand why you are talking about $300 million in revenue. It appears to me that IBM may get more revenue from the cloud than Amazon. What did Amazon say in the earnings release about their cloud revenue?

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