As cloud computing continues to eat up traditional tech spending, businesses are beginning to change where they invest their money.
Alibaba (NYSE: BABA), a Chinese e-commerce giant that is often compared to Amazon (NASDAQ: AMZN), entered the cloud computing business in 2009 and is now the biggest player in China followed by other tech giants like Baidu (NASDAQ: BIDU) and Tencent.
Although Alibaba’s basic e-commerce is fundamentally different from that of Amazon as it mostly focuses on its B2B segment, it has still seen success and has been profitable in the past. Amazon once faced problems making money through its e-commerce model. It launched its cloud business in 2006 and it has grown substantially. Today, its cloud business comprises only approximately 10% of its revenue but more than 60% of its operating income. Its cloud operating margin currently stands somewhere in the mid-twenties and has upside potential according to some analysts.
Cloud computing is transforming the way companies across the world do business and it plays an even bigger role in China. Alibaba now commands more than 60% of the Chinese market with more than 1 million customers. Tencent, which plays a strong role in gaming and tech-related products in China offered 10TB of free data just to tempt companies to put their data on its servers.
Vendors like Microsoft (NASDAQ: MSFT), Oracle (NYSE: ORCL) and SAP have pivoted from their traditional safe & profitable software businesses where they drove confident business models and double-digit operating margins. The cloud portion of their businesses had substantial risk and was not profitable in the very beginning, but their bets turned out to be fruitful as cloud gained popularity over the years and almost all industries today rely on it to store and manage their data. The industry has largely benefitted from the increased scale of data centers, declining professional services and acquisition-related costs.
The global cloud computing market size was $182.4 billion in 2018 and is expected to rise to $331 billion by 2022, with a compounded annual growth rate (CAGR) of 29.2%. Amazon and Microsoft continue to fight for top position, followed by players like IBM (NYSE: IBM), Google (NASDAQ: GOOGL), Salesforce (NYSE: CRM), Rackspace, Dell (NYSE: DELL), etc. According to tech research firm Gartner, Amazon had a market share of roughly 52% early last year, but after Microsoft won the highly contested JEDI contract in October it might take a lead due to its high value. Google entered late into the market with just 3% market share at the moment but is trying hard to expand its cloud business.
The cloud industry is rapidly evolving and currently experiencing different trends. Big IT customers for these cloud operators are not enthused by the idea of surrendering control over its most sensitive data to one cloud provider. This brings in the concept of a Hybrid cloud that enables companies to host their data on a combination of private and multiple public clouds. Microsoft has taken an initiative with the launch of its Azure Stack & Google’s Anthos which was released earlier this year. This threatens traditional IT companies like IBM, HP (NYSE: HP), and Dell, as much of their cloud revenue has been from selling the same old hardware and software for customers to run in their own data centers. IBM’s response to this was a $34 billion acquisition of Red Hat to link the cloud with its IT.
According to RightScale’s 2019 state of cloud report, 91% of businesses reported using a public cloud service, 72% opting for a private cloud solution, and 69% using a hybrid cloud solution. IT and infrastructure spending is projected to double over the next five years, which means there is much more potential for the industry to grow and more players to participate.
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Contributing Writer at MyWallSt
Shivam’s favorite stock is Xilinx because he believes that it brings something groundbreaking to the very competitive semiconductor industry.