The global cloud services market is expected to grow from 18% annually to $246.8 billion this year, according to Gartner's latest estimates. Wikibon expects enterprise cloud spending to grow at a compound annual growth run rate of 16% between 2016 and 2026.
Those figures make the cloud computing market a lucrative one for tech investors, but it's tough to narrow down the best buys in the industry. Today, I'll focus on three "no brainer" stocks in that market, which will benefit from the growth of the cloud computing market over the next few years.
Source: Getty Images.
Amazon
Amazon (AMZN -1.67%) is the 800-pound gorilla of cloud computing, since its AWS (Amazon Web Services) platform is the biggest cloud infrastructure service in the world. AWS stores data and hosts content for companies, and its tools enable developers to create and run cloud-based apps. It added over 400 new tools to AWS in the last quarter alone.
During that quarter, AWS' revenue rose 42% annually to $4.1 billion and accounted for 11% of Amazon's top line. That gives the segment a run rate of $14.5 billion over the past four quarters. Wikibon expects AWS to generate $43 billion in annual revenues by fiscal 2022 -- which would account for 8.2% of all cloud spending worldwide.
AWS' operating profit rose 28% to $916 million last quarter, compared to just $628 million in operating income for the entire company. Therefore, the growth of the higher-margin AWS unit easily offsets bottom line declines at its North American and International marketplace businesses -- which are using low-margin and loss-leading strategies to lock in customers. That virtuous cycle enables Amazon to continue dominating both the cloud computing and e-commerce markets.
Microsoft
Microsoft (MSFT -0.64%) rules the software-as-a-service market with consumer-facing products like Office 365, Dynamics CRM (customer relationship management), and Skype. Its cloud platform, Azure, is the second largest cloud infrastructure platform in the world after AWS. Microsoft reported that all these services generated a "commercial cloud" annualized run rate of $18.9 billion last quarter.
That puts Microsoft on track to exceed CEO Satya Nadella's goal of hitting $20 billion in annual cloud revenues by the end of fiscal 2018. That figure would represent nearly a fifth of its projected revenue for the year, and reduce its overall dependence on traditional Windows licenses.
Microsoft missed the shift toward mobile operating systems, and it recently killed off Windows Phone. But it's clawing its way back in the mobile market with mobile versions of its flagship apps (Office, Outlook, OneDrive, and OneNote) for iOS and Android. By tethering its cloud-based ecosystem to those two operating systems, Microsoft can remain relevant in the "mobile-first, cloud-first" market which Nadella highlighted in his first email to Microsoft employees.
Salesforce
Salesforce (CRM 0.12%) is the largest provider of cloud-based CRM services in the world. These services help companies retain and organize relationships with customers. Salesforce controlled 18.1% of that market in 2016, according to IDC, while its closest rivals -- Oracle and SAP -- respectively controlled just 9.4% and 7.2%.
Salesforce is still firing on all cylinders. Its revenue rose 26% to $8.39 billion last year, and analysts anticipate 24% growth this year. Its non-GAAP earnings also jumped 35% last year, and Wall Street expects 30% growth this year. However, the bears often note that Salesforce isn't consistently profitable on a GAAP basis. They also point out that Microsoft's Dynamics is gaining ground in the CRM market with the support of Outlook, Skype, Azure, LinkedIn, and other applications.
Nonetheless, Salesforce remains the go-to vendor for CRM solutions, and new features like Einstein -- which uses AI to crunch customer data into business predictions -- should further widen its moat against the competition.
But mind the risks...
Amazon, Microsoft, and Salesforce are all smart ways to invest in the growing cloud computing market, but investors shouldn't ignore the risks. Amazon and Salesforce's valuations are high relative to their peers, so a market downturn could sink both stocks. Microsoft's cloud growth is impressive, but those investments are also weighing down its bottom line growth. Investors should weigh these risks against the potential rewards to see if these cloud-oriented stocks are right for their portfolios.
