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Forget IBM, Amazon Is a Better Cloud Computing Stock

By Leo Sun - Updated Mar 8, 2021 at 12:40PM

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Stick with the profitable market leader instead of the hopeful underdog.

Editor's note: This article has been corrected. IBM generates most of its cloud revenue from its global technology services (GTS) segment.

Over the past decade, IBM (IBM -2.47%) has attempted to reinvent itself as a cloud services company through big investments and acquisitions. Unfortunately, all that spending couldn't offset the ongoing declines at its legacy IT services, business software, and hardware segments.

IBM's revenue fell 5% to $73.6 billion in 2020. Its cloud revenue rose 19% to $25.1 billion, thanks to its acquisition of Red Hat, but still couldn't offset the weakness of its older businesses. The pandemic exacerbated that slowdown by curbing enterprise spending and postponing major deals.

IBM plans to spin off its managed IT services unit into another company later this year, then focus on expanding the "new" IBM's hybrid cloud and artificial intelligence (AI) services to generate sustainable revenue growth again.

IBM's shares look cheap at 10 times forward earnings, and it pays a high forward dividend yield of 5.4%. However, the stock's 5% price decline over the past 12 months suggests investors still aren't convinced Big Blue's latest turnaround efforts will pay off. Instead of waiting for IBM's upcoming split, investors should simply stick with Amazon (AMZN 0.19%) as their main cloud computing stock for three reasons.

A seated man catching cash falling from a cloud.

Image source: Getty Images.

1. An early-moving market leader

Amazon established Amazon Web Services (AWS) nearly two decades ago to provide internet-based computing services. AWS eventually became the world's largest cloud infrastructure platform, and currently provides cloud storage, computing power, and other services to big clients like Netflix, Verizon, and Capital One.

AWS controlled 32% of the global cloud infrastructure market in the fourth quarter of 2020, according to Canalys, which was nearly unchanged from the previous year. Its closest competitor, Microsoft's (MSFT -0.37%) Azure, grew its market share from 18% to 20% during the same period.

Alphabet's (GOOG -1.47%) (GOOGL -1.35%) Google and Alibaba (BABA 0.43%) Cloud, which rank third and fourth, respectively, still hold single-digit percentage shares. IBM's share, which isn't even significant enough to report separately, is clumped together with all the other remaining platforms.

2. Amazon offers the most financial transparency

Amazon started disaggregating AWS' revenue and operating profits in 2015, revealing that its market-leading cloud platform was also profitable.

AWS' revenue rose 30% to $45.4 billion in 2020, and its operating profit jumped 47% to $13.5 billion. That accounted for 12% of Amazon's total revenue in 2020, but 59% of its total operating profits.

Servers in a data center.

Image source: Getty Images.

AWS' profits support the growth of Amazon's lower-margin online marketplaces. Amazon is also the only American cloud giant that clearly discloses its cloud revenue and profits.

Microsoft reports Azure's year-over-year revenue growth rates, but it doesn't disclose its exact revenue or profits. Google reports Google Cloud's revenue, but not its profits.

Alibaba claims Alibaba Cloud is profitable, but that's only on an adjusted EBITDA basis, which excludes its high stock-based compensation and other variable expenses. On a GAAP basis, it's still deeply unprofitable.

IBM generates most of its cloud revenue from its global technology services (GTS) segment, and its "total" cloud revenue ropes in the cloud services from its other segments. Its total cloud revenue rose 19% to $25.1 billion in 2020. That growth rate seems robust, but it trails far behind Amazon, Microsoft, and Google’s cloud revenue growth over the past year -- which indicates it didn’t benefit as much from the pandemic-related tailwinds as its peers. IBM didn’t reveal if the total cloud business, in its scattered entirety, is profitable or not.

Amazon's confidence in AWS is reflected in its clear reporting methods. Its cloud competitors, including IBM, aren't willing to pull back the curtain yet -- which indicates they're all burning cash to catch up.

3. Amazon is also a hybrid cloud and AI play

IBM's new CEO, Arvind Krishna, wants the company to leverage its strong position in private on-site clouds to expand its presence in the "hybrid" cloud that rests between private and public cloud services.

Krishna realizes IBM can't go toe-to-toe against AWS and Azure in public cloud platforms, so he wants to launch open-source software solutions -- which are universally compatible with myriad software services -- to bridge the gap between a client's on-site servers and public cloud platforms.

That's why IBM acquired the open-source software developer Red Hat, and why it's launching more AI services that process data within the hybrid cloud. That niche approach might sound appealing, but it glosses over the fact that AWS is also expanding its presence in the hybrid cloud and AI markets.

AWS now offers virtual private clouds for launching AWS services within an internal network. It also provides hybrid cloud services via AWS Outposts, as well as a growing portfolio of AI and machine learning tools for crunching all that data. In short, AWS is already offering what IBM is promising.

The bottom line

I'm not saying that IBM's bold spin-off and turnaround plans are doomed to fail. But I believe Amazon will remain a simpler, faster-growing, and far more transparent play on the growing cloud computing market than Big Blue for the foreseeable future.

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Stocks Mentioned

Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$2,146.38 (0.19%) $4.13
International Business Machines Corporation Stock Quote
International Business Machines Corporation
IBM
$129.66 (-2.47%) $-3.28
Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$253.14 (-0.37%) $0.94
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$2,207.68 (-1.35%) $-30.31
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOG
$2,214.91 (-1.47%) $-33.11
Alibaba Group Holding Limited Stock Quote
Alibaba Group Holding Limited
BABA
$87.69 (0.43%) $0.38

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