The global cloud computing industry is expected to grow from $219 billion in 2020 to over $791 billion by 2028, according to Fortune Business Insights -- a compound annual growth rate of nearly 18%. A few major players dominate the space, and a couple of those look poised to provide shareholders with massive returns in 2022 and beyond. But for investors ready to seek options off the beaten path, a certain smaller niche player could be highly rewarding.
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Amazon
One cannot talk about the cloud without mentioning the most dominant player: Amazon (AMZN -2.56%). Amazon Web Services (AWS) accounts for over 30% of the global cloud infrastructure market, and most of the tech giant's profits come from its cloud business, not its e-commerce operation. Amazon's retail business is a low-margin operation, and it has struggled to realize net earnings independently. The massive success of AWS has propelled the company's share price to its current level, and its market cap to more than $1.7 trillion.
Through the first nine months of 2021, AWS accounted for just 13% of Amazon's revenue but nearly 62% of its operating income. Operating income for AWS was up 33% from the same period in 2020 on a 36% increase in top-line sales. The cloud services division is Amazon's fastest-growing segment, and its revenue growth is accelerating.
Meanwhile, its e-commerce business is experiencing headwinds due to rising prices, supply chain disruptions, and expenses relating to COVID-19. Despite this, the AWS segment is delivering record results to keep the company profitable. Once those headwinds begin to subside, the company will be set to outpace the market in 2022.
Alphabet
Alphabet (GOOG -1.10%) (GOOGL -1.23%) trails only Amazon and Microsoft (MSFT -1.27%) in cloud services market share. For the first nine months of 2021, Google Cloud brought in $13.7 billion in revenue, up 49% from $9.2 billion during the same period in 2020. That should give investors terrific reason to be optimistic about the stock. Over the same period, Alphabet's total revenue also rose by a whopping 45% as advertisers returned to increased spending after a down 2020.
There are several other reasons to be bullish about Alphabet in 2022. First, the company's profitability is increasing. While revenue rose 45% in the first three quarters of 2021, operating income was up 122%, and earnings per share (EPS) rose 126%. Part of that EPS gain can be attributed to the company's prolific share buybacks. Google has repurchased more than $44 billion worth of stock over the past 12 months, providing an effective (and tax-deferred) return of capital to shareholders.
GOOG Stock Buybacks (TTM) data by YCharts
The buybacks are expected to continue in 2022, and will further support the share price by contributing to the baseline level of demand for Alphabet shares.
Finally, the tech giant has the most attractive valuation among its chief cloud peers. Alphabet currently trades at a forward-EV-to-EBITDA ratio of just 15, compared to 19 for Amazon and 25 for Microsoft. Considering Alphabet's terrific results in the first three quarters of 2021, the strong growth of Google Cloud, and its advertising tailwinds, the company looks set to beat the market handily in 2022 and beyond.
Image source: Getty Images.
DigitalOcean
How can a relatively small company like DigitalOcean (DOCN -1.52%) possibly compete with the juggernauts mentioned above? Easy -- by focusing on a specific niche so it's not vying directly for the same customers they are. DigitalOcean is everything those more prominent players are not. Its offerings are designed for small and medium-sized businesses (SMBs) rather than huge operations. It offers straightforward pricing, curative solutions, and prides itself on excellent customer service.
The focus on SMBs does not mean that DigitalOcean has a small market for its services. The company estimates that there are 100 million SMBs globally, and says that 14 million of them are formed each year. Because of this, the company estimates its total addressable market will reach $116 billion by 2024. Its revenues rose from $203 million in 2018 to an estimated $427 million in fiscal 2021 -- a compound annual growth rate of 28%. In 2021 alone, management expects revenue growth will accelerate to 34%, and expects adjusted EBITDA of $130 million for 2021, giving it a margin of 30%. Even better, the company has no long-term debt and plenty of cash on hand.
DOCN Cash and Equivalents (Quarterly) data by YCharts
As such, DigitalOcean has the leverage to grow its business without the need to raise funds via dilutive stock offerings or debt sales to finance general operations for the foreseeable future. All of this adds up to a solid outlook for long-term investors in DigitalOcean stock.
