The cloud infrastructure market is dominated by Amazon Web Services (AWS) and Microsoft Azure. Together, these two platforms account for around 55% of global cloud infrastructure spending.
While catching up with AWS and Azure will be difficult, there's plenty of room for smaller players to build fast-growing, highly profitable cloud infrastructure businesses. Two underdogs that are having success are Oracle (ORCL 3.65%) and Alphabet (GOOG +0.37%)(GOOGL +0.09%).
Oracle
Software giant Oracle has leaned into the AI boom, ensuring that its cloud infrastructure is well suited for the kinds of computationally intense workloads necessary to train and run advanced AI models. "Oracle's Gen2 Cloud has quickly become the number 1 choice for running Generative AI workloads," said Chairman Larry Ellison in the company's latest earnings report.
NYSE: ORCL
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This isn't just boasting. Oracle's cloud infrastructure revenue reached $1.4 billion in the fourth quarter of fiscal 2023, which ended May 31, up a whopping 76% year over year. The company poured $8.7 billion into capital expenditures during the full fiscal year, up from $4.5 billion in the previous year, as it expanded its network of cloud data centers. Oracle expects capital spending to be similar in fiscal 2024.
Generative AI customers, which include companies like MosaicML, Cohere, Hyperreal, and Layton Space, have signed contracts to purchase more than $2 billion of cloud computing capacity on Oracle's platform. The company has also teamed with Cohere, which allows customers to train and run large language models, to launch a generative AI cloud service for enterprise customers.
Beyond AI, Oracle has taken some steps to lure developers over to its cloud platform. The company offers a generous free tier, which includes free database instances and other services, and it recently rolled out a free developer version of its flagship database software that can be run anywhere. Oracle's success in scoring the hottest AI companies as customers will surely improve its reputation and help it shed its image as a stodgy enterprise software provider.
While Oracle's overall revenue growth excluding the impact of acquisitions is sluggish, the cloud business can accelerate that growth as it expands in the coming years. The company is still a small player in the cloud infrastructure market, but it's carving out a potentially lucrative niche in the realm of generative AI workloads.
Alphabet
Google parent Alphabet has watched rivals Amazon and Microsoft run away with the cloud computing market. Google Cloud is the No. 3 provider globally, but its 10% share of the infrastructure-as-a-service, platform-as-a-service, and private cloud services market is far behind the market leaders. Microsoft's Azure claimed a 23% market share in the first quarter of 2023, while Amazon Web Services controlled 32% of the market.
NASDAQ: GOOG
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Part of the problem is that Google is primarily a consumer-facing company. When a big enterprise is looking for a cloud computing provider, Amazon or Microsoft are safer choices. AWS pioneered the cloud computing industry and has long been laser-focused on the enterprise, and Microsoft is Microsoft.
Under Thomas Kurian, who has led Google's cloud business for the past few years, the company has made progress in luring enterprise customers. A mind shift was required. Google was great at building technology but not so good at building solutions for customers. That had to change.
Google's cloud business has focused on developing product road maps, improving customer service, and boosting infrastructure efficiency. Partnering up with companies like MongoDB -- and allowing customers to receive a single bill that includes any services managed through Google's cloud -- greatly improved the experience.
On the financial front, these efforts have paid off as well. While revenue growth for Google Cloud has slowed as businesses pull back on spending in a tough economy, the segment is now profitable. Google Cloud revenue rose 28% year over year in the first quarter of 2023 to $7.5 billion, and segment operating income swung nearly $1 billion in the positive direction to a gain of $191 million. After years of massive, chronic losses, Google Cloud is now a source of profits for the company.
Alphabet may not be able to overtake Amazon or Microsoft in terms of market share, but it can still build out a successful, profitable cloud business. There's room for multiple winners, and Alphabet is aiming to be one of them.
