The Cloud Infrastructure Market Crushed It Again in 2019

While much of the tech industry experienced a bit of a downturn in 2019 due to the U.S.-China trade war and overcapacity, that was mainly confined to hardware-related companies in the tech supply chain. Meanwhile, technology services, especially in cloud computing, continued their torrid growth last year, according to the latest annual report from research firm Canalys.

The new Canalys report is interesting because it aims to separate out cloud infrastructure-as-a-service (IaaS), which encompasses basic storage and compute functions, from more specialized software-as-a-service and platform-as-a-service offerings. Therefore, the Canalys report is likely a better apples-to-apples comparison of the cloud giants' relative performances than the companies' own financial releases, which often lump in infrastructure revenue with these other categories (and more).

So, which cloud infrastructure players fared the best in 2019? And what's in store for 2020 and beyond?

The cloud infrastructure market grew 37.6% in 2019. Image source: Getty Images.

Massive growth numbers

According to the report, the overall cloud infrastructure market grew 37.6% in 2019, from $77.8 billion to $107.1 billion -- huge growth for an industry that large. Obviously, the switch from on-premises data centers to public cloud utilities is in full swing. Canalys analysts write that the report "highlights the unrelenting expansion of the IT industry, driven by digital transformation initiatives across all industries." 

Even better, Canalys doesn't expect that growth to slow down very much. Its analysts expect companies to expand cloud usage in order to "take advantage of the unlimited access to capacity, more advanced services, such as AI and analytics, as well as APIs and other tools to accelerate their digital development." 

Canalys expects the infrastructure market to grow another 32% in 2020 to $141 billion, and projects the infrastructure market to reach a whopping $284 billion by 2024. That's good for a compound annual growth rate of 21.5%, still incredible growth for what will then be an even bigger, more mature business.

2019 infrastructure winners: The strong get stronger

Nearly all of the top cloud infrastructure providers had great years in 2019, with the biggest players mostly increasing their respective market shares.

Data source: Canalys.

As you can see, 2019 was yet another case of the strongest cloud companies gaining market share at the expense of smaller subscale rivals, with the slight exception of Amazon Web Services (AWS). This appears to be where the market is heading, as larger-scale players with more internal IT resources appear to have a competitive advantage. I'd expect most of these top players to continue to chip away at the remaining 40% share of the infrastructure market that's still going to smaller cloud vendors, which means these top cloud stocks should continue to outgrow the industry over the next five years.

Some may view these results as especially bullish for Microsoft Azure and Alphabet's Google Cloud and somewhat bearish for Amazon, but I wouldn't exactly scoff at Amazon's results. AWS is still far and away the cloud leader, and must contend with its much larger size when comparing growth rates. Additionally, according to Canalys, most large enterprises are determined to use multiple clouds in order to prevent "lock-in" to a single vendor, as well as take advantage of the different capabilities among cloud vendors for different kinds of workloads.

Even with the headwind of enterprises practically mandated to use multiple clouds, and with competitors Microsoft and Google investing huge amounts of money to catch up, Amazon still outpaced all rivals in terms of overall dollar-based growth in 2020, holding its market share nearly flat. 

Looking ahead

Canalys notes that cloud purchasing is becoming more ordered and mature, with companies signing on to larger, longer-term deals. That should continue to benefit the market leaders at the expense of smaller rivals, which is why I believe these cloud leaders are must-own stocks for the next 10 years.

Interestingly, the report also noted that spending from the "big seven" cloud players on data centers moderated in 2019, up only 8% compared with a huge 46% spending surge in 2018, as the cloud companies wrung more efficiencies out of their existing capacity. That explains a lot of the drop in semiconductor and memory stocks in early 2019. However, looking ahead, I'd expect spending to roughly line up with the overall IaaS market growth -- so likely higher than 2019, but probably lower than 2018. Therefore, hardware plays across memory, storage, semiconductors, and semiconductor manufacturing equipment could be in for a recovery in the year ahead off of a soft 2019.

While COVID-19 may throw a wrench into the timing of that recovery depending on how it spreads, the long-term picture for all related companies -- cloud providers and their chip suppliers alike -- appears to still be quite rosy indeed. Cloud-related stocks remain the most attractive part of the technology sector today.