One of the fastest-growing areas in tech today is cloud computing. In simplest terms, cloud computing is the delivery of computing services over the internet. It's an infrastructure-as-a-service model where customers can pool resources, such as processing power and storage, and are able to scale their usage up and down quickly. It is attractive to many organizations because they don't have to buy and maintain their own servers and storage systems.
Cloud computing is a high-fixed-cost business that benefits from economies of scale. When these businesses achieve enough scale to cover their fixed costs, they then see a lot of operating leverage, where their profitability growth greatly exceeds their revenue growth.
While there has been a continued shift of organizations moving from on-premise solutions to the cloud, the advent of artificial intelligence (AI) has really kick-started strong growth for the sector. The reason is that customers are using cloud computing services to customize foundational AI models or create their own models and apps, and then run their AI workloads through their infrastructure.
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While not without risks, this is a huge megatrend that is benefiting several companies. One risk would be overbuilding data center capacity that does not get used, although some cloud providers have argued that the bigger risk is underinvesting and falling behind.
Let's look at three no-brainer ways to play the cloud computing trend.
1. Amazon
Amazon (AMZN +2.17%) created the cloud computing industry following its own struggles to scale its infrastructure needs, and today it is the largest cloud computing service in the world, with nearly a 30% market share. While best known for its e-commerce operations, its Amazon Web Services (AWS) cloud computing segment is both its largest by profitability and its fastest growing. Last quarter, AWS revenue rose 17% year over year to $29.3 billion, while operating income climbed 22% to $11.5 billion.
NASDAQ: AMZN
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AWS' growth is being powered by its Bedrock and SageMaker solutions. Bedrock lets customers tap into top AI foundation models from both Amazon as well as third parties, which they can then customize for their own needs. SageMaker, meanwhile, gives users the tools to build and train their own models from the ground up.
Amazon, through its Annapurna Labs division, has also built its own custom AI chips to power its cloud business. Its Trainium chip is designed to train large AI models, while its Inferentia chip is built to run AI inference. Custom chips are more efficient and use less power than mass-market graphics processing units (GPUs), giving Amazon a cost advantage.
2. Microsoft
While AWS remains the largest cloud computing business in the world, Microsoft (MSFT +2.05%) Azure has been gaining market share in the space. Azure revenue has climbed by 30% or more for each of the past seven quarters, including by 33% last quarter, bringing its market share to around 22%.
The company's partnership with leading AI foundational model company OpenAI has helped set it apart. Its platform gives direct access to OpenAI's leading AI models, so that customers can integrate them securely into their applications. It's also embedded OpenAI's models throughout its ecosystem, including with its popular GitHub code repository that is run on Azure.
NASDAQ: MSFT
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Microsoft is now looking to branch out. It began hosting models from Elon Musk's xAI, and it hired the co-founder of DeepMind to start developing its own AI models. While this move carries some risk, diversifying its AI portfolio and forging its own AI path should be a big opportunity.
3. Alphabet
While some investors worry about the impact of AI of its search business, there is no denying that AI is helping power Alphabet's (GOOGL +2.12%) (GOOG +2.20%) cloud computing division, Google Cloud. The smallest of the big three cloud computing businesses, with about a 12% market share, Google Cloud has recently reached a profitability inflection point.
This could be seen in its first-quarter results, when Google Cloud revenue climbed 28% year over year to $12.3 billion, while its segment operating income surged 142% to $2.2 billion. Like its competitors, the company benefits from the growing demand for AI services.
NASDAQ: GOOGL
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The company's Vertex AI machine learning platform, analytics tools like BigQuery, and leadership in Kubernetes help set it apart. Google developed Kubernetes to run and automatically manage apps on containers, which are software packages that bundle apps with everything they need to run. Vertex AI, meanwhile, is Google Cloud's end-to-end machine learning platform that lets customers easily build, deploy, and manage AI models.
Alphabet has also developed one of the most advanced foundation AI models with Gemini, which Google Cloud customers can fine-tune for their own custom models and apps. With the help of Broadcom, it has also developed its own custom AI chips to help lower costs.
Now, notably, search is still the largest part of Alphabet's business, and some investors fear it is getting disrupted by AI. However, I think investors are overlooking the distribution (Google is the default search engine for most devices and browsers) and network (its ad network can reach anything from a local to a global audience) advantages it has. Meanwhile, Google Cloud looks poised to just grow bigger and bigger.
