Based on its stock price run since announcing fiscal 2015 Q3 earnings on April 23, Microsoft (MSFT +1.01%) investors seem to have finally begun measuring its financial results with a focus on its cloud-related revenues -- one of CEO Satya Nadella's "mobile-first, cloud-first" pillars. The result has been a 12% jump in share price this past week alone, as of this writing, pushing Microsoft's stock up near 52-week highs.
Following its stellar cloud-related sales last quarter, investors could make the argument Microsoft rules the cloud roost: its annual run-rate is growing by leaps and bounds. Why then, are there still multiple industry pundits singing the Amazon.com (AMZN 0.41%) cloud song? At long last, Amazon.com broke out its Amazon Web Services (AWS) revenues last quarter, and boasts some impressive cloud results of its own: but just a hair behind Microsoft's revenues. So, what gives?
Two pieces of the cloud puzzle
The disconnect between who is really leading the cloud wars are the various services and solutions available, and which area of the cloud folks like Amazon.com, Microsoft, and fast-growing IBM (IBM +1.93%) choose to focus on. That's why firms like Synergy Research Group release reports with headlines saying, "AWS Still Bigger than its Four Main Competitors Combined Despite Surging Growth," as it did a few days ago.
Thing is, AWS does generate more cloud revenues than Microsoft, IBM, and others: in infrastructure. However, infrastructure is only one piece of the pie, the other being Software-as-a-Service (SaaS). It's this latter suite of solutions that, depending on which industry pundit you choose to listen to, offers the most upside in the fast-growing cloud space.
How they really stack up
Last quarter, AWS generated a strong $1.57 billion in cloud revenues, equal to $6.28 billion on an annual basis. The vast majority of that revenue is from infrastructure, lending credence to the Synergy headline.
Microsoft, on the other hand, grew its cloud revenues triple digits last quarter -- again -- and is now on pace to generate $6.3 billion in sales annually. And let's not forget IBM, which is quickly making a name for itself in the SaaS space. Like Microsoft, IBM was late to the cloud party, but as of last quarter it boasts an annual run-rate of $3.8 billion in cloud revenues.
Perhaps most impressive about Microsoft's cloud-related financial performance, just as with IBM, is how quickly the two have become such significant players. AWS is widely seen as the elder statesmen in cloud hosting, with about 10 years of experience under its belt. And already Microsoft is neck-and-neck based on total cloud sales, and IBM is making up ground by leaps and bounds. Why? Because volume may be on the side of infrastructure, but the money is in SaaS.
Follow the money
To be sure, there are those of the mind that cloud infrastructure is growing faster than SaaS. However, as AWS knows first-hand following its on-going pricing wars with competitors, cloud-hosting is quickly becoming a commodity. Going forward -- particularly with the advent of the Internet of Things (IoT) -- amassing and housing all that data in the cloud from connected cars, homes, and even cities, to name but a few IoT information sources, will simply be step one.
Analyzing and delivering actionable results via cloud-based SaaS solutions is where the money's at, and it is expected to explode in the coming years. According to one estimate, by next year SaaS delivered via the cloud will generate over $100 billion in revenue annually, and grow 30% each of the successive three years. And that's where Microsoft and IBM enter the picture.
Microsoft's bevy of SaaS services are incorporated into its fast-growing Azure cloud platform. Again, it's not just about amassing the data, it's about using it to drive better business decisions. IBM with its big data and predictive computing services are already scoring some big cloud wins.
Don't be fooled by the headlines: there's a lot more to winning the cloud wars than infrastructure, which is why Microsoft is already leading the way. And why it won't be long before IBM blows by AWS, too.
