
Discover more from Grit Capital
Hi Everyone 👋
Welcome to the +823 new subscribers who have joined this week. If you’re reading this but haven’t subscribed, join our community of +90k smart, fun & edgy investors 👇

*This is sponsored advertising content.
You hear it all the time - “the cloud”
“Oh yeah! we’re pushing workflows to the cloud in order to optimize productivity”
Sounds pretty cool, doesn’t it?
The megacap cloud companies have been expanding rapidly, as investors flock to this high-growth, high-margin area of the market.
But this earnings period was especially spooky for growth investors. The scariest words in all of growth? Deceleration
And we saw this in spades when it comes to the cloud providers this quarter.
In this week’s free version of the newsletter, we will cover solely what happened this week in cloud earnings for megacap tech companies.
While the cloud segment has readthroughs for the tech industry overall, they are not the whole picture. Those with access to this month’s PAID version of the newsletter will get a FULL deep dive into all the moving pieces amongst the megacap tech names.
Join the over 1,000 paid subscribers in order to get access to the full nitty-GRITTY
This week, in <5 minutes, we’ll cover the cloud monsters:
Origin Story 👉 How Data was collected, stored, and optimized = On-prem
What is the Cloud? 👉 Off-Premises Workflow Optimization
Market Overview 👉 SaaS, IaaS, PaaS
Earnings Period 👉 What happened this quarter?
Let’s get started!
1. Origin Story 👉 How Data was collected, stored, optimized = On-prem
Back in the 1970s and 1980s, if you were a large corporation, you bought IBM mainframes in the 70s, then you bought more of them in the 80s. Then, in the 80s and 90s, they moved slow and multi-decade cycles to PCs and Windows that were powered through Oracle and SAP.
If you were a large corporation in the 1970s, you bought IBM mainframes. You also bought more of them in the 1980s. Then through the 80s and 90s and beyond, during a slow multi-decade cycle, they moved to PCs and Windows that were powered through Oracle and S&P.
This is largely referred to as the era of on-prem, or, on-premises solutions. This meant that the data was highly localized, stored in hardware nodes, and clunky. It meant that the data stored couldn’t really “talk to each other” and was largely siloed off and stored in a simple store and recall, read-only, or maybe even read-write functions.
The software consisted of databases and modules combined to particularly serve the unique needs of a large organization when it came to automating corporate-wide business systems as a function.
This involved very high initial capex build-out costs from the hardware side before shrinkwrap software could be layered on top of it. The software component was typically a large upfront cost in terms of a license then you add on professional services and maintenance as an ongoing and recurring expense.
When you installed an on-prem solution, YOU were the one mainly responsible for the daily operation and maintenance of the system itself, which required hiring teams of IT people to maintain.
If you didn’t have a backup system, if your database was set on fire…hasta la vista, baby.
This obviously doesn’t sound sustainable, so here comes cloud and SaaS…
2. What is the Cloud? 👉 Off-Premises Workflow Optimization
Simply put, cloud computing is the delivery of computing services—including servers, storage, databases, networking, software, analytics, and intelligence—over the internet, AKA “the cloud”, to offer faster innovation, flexible resources, and economies of scale.
Traditional massive clunky systems require heavy capex infrastructure investments whereas cloud technology can get businesses up and running for a fraction of the cost in a very short period of time.
This allows building technology applications to be more dynamic, secure, productive, and reliable. It also allows data collected across different nodes to “talk to each other” in order to drive more actionable decisions and increase productivity.
The revenue model is very different. It eschews the heavy capex upfront costs for everyone’s favourite acronym, SaaS (Software-as-a-Service). Instead of license and maintenance fees, a simple subscription revenue on a per-seat basis is implemented.
There are pros and cons to this. While this may reduce costs in the short run, the recurring nature of the costs may exceed the startup costs when brought to scale. Think of it as outsourcing functions. Heinz doesn’t want to worry about backend enterprise resource planning systems, they just want to make Ketchup.
On a return-on-investment basis, SaaS products are a no-brainer for many companies.
There are three main types of cloud:
Public: Owned and operated by a third-party cloud service provider that delivers their computing resources, like servers and storage, over the internet. Examples include Microsoft’s Azure, Google’s GCP, and Amazon’s AWS (more on these in the next section)
Private: Cloud computing resources are used exclusively by a single business or organization. Some companies also pay third-party service providers to host their private cloud. A private cloud is one in which the services and infrastructure are maintained on a private network.
Hybrid: Combine public and private clouds, bound together by technology that allows data and applications to be shared between them.
For the purpose of this note, we will be referring mainly to public clouds.
Before we continue, let’s check in with our Outrageous Chartered FinMEME Analyst Dr. Patel!
3. Market Overview 👉 SaaS, IaaS, PaaS
The best way to define “cloud” is across three general buckets:
SaaS: The provider will install software on the server and provide access to the users that have subscribed to that software.
IaaS (Infrastructure as a Service): The provider will provide you with all the resources such as servers, storage capacity, and networking on demand.
PaaS (Platform as a Service): The provider allows you to use their cloud services such as managing, developing, and testing applications.
The major drivers fueling market expansion are expanding digital transformation across businesses, rising internet and mobile device adoption around the world, and increasing consumption of Big Data.
Next-generation industrial solutions will primarily be cloud-enabled, and a cloud platform will be required to enhance business capabilities.
4. Earnings Period 👉 What happened this quarter?
AMZN 0.00%↑ Amazon
Every pitch deck you see for a high-growth company will show some projection line of a mythical hockey-stick curve, but how’s this for a hockey stick:
Here are the YoY growth figures:
By the Numbers:
AWS revenue of $20.5B (up 28% ex-FX vs. 33% in Q2) came in below the Street’s $21.1B (33%).
AWS Operating Income of $5.4B (26% margin) also came in below the Street’s $6.4B (30% margin).
While quarter-over-quarter margin trends fluctuate somewhat, management pointed to higher SBC and energy costs as key reasons for lower-than-expected AWS operating income (and margin) in Q3. The operating margin for Q3 was the lowest seen since Q4/19!
Stock-based comp is also a tricky issue, but that’s an issue for an entire newsletter in the future.
Analysts frequently use backlog to project future growth. AWS backlog of $104.3B, up 57% Y/Y vs. 65% in Q2 is also a slowdown in booking, but still - this is a healthy growth rate when you consider the maturity of the business.
GOOGL 0.00%↑ Google
Let’s re-create those two charts for Google under their “Google Cloud” segment as reported. Revenue:
YoY Growth:
With a shorter history of reporting, we can’t go as far back as we can with AWS so the charts are more truncated.
By the Numbers:
Q3 Cloud Revenue of $6.9B came ~3% above the Street, up 38% Y/Y
Cloud losses showed modest Q/Q improvement to ($699MM), or (10%) margin.
Management highlighted that Cloud adoption continues to play an even stronger role during uncertain macroeconomic times and announced new and expanding partnerships with Toyota, Prudential plc, Coinbase and AppLovin. TM 0.00%↑ PUK 0.00%↑ COIN 0.00%↑ APP 0.00%↑
MSFT 0.00%↑ Microsoft
For Microsoft, we’ll just pull out the YoY growth as the Azure pull-out from the general cloud bucket is sometimes muddied from absolute dollars:
MSFT seems to have been able to maintain its growth rate except for the most recent quarter drop.
By the Numbers:
Azure decelerated to +42% y/y in c/c, down from 46% in 4Q22
Management guided to +37% growth in c/c in 2Q23,
This was seen as a positive, as management shredded some investor doubt on demand for cloud services. However, management clarified that the per-seat business (i.e. EMS) was moderating while enterprise consumption trends remained healthy
Wrapping Up…
Cloud technology is driving the “digitalization as everything.” While you can throw fancy labels and acronyms on them, it all boils down to one thing: changing what “work” looks like. This adds flexibility, scalability, interoperability, and ultimately productivity to all business functions.
But the problem with high growth is that you run into two things: the law of large numbers and the expectations for future growth. It’s very tough to out-pace both. What we saw this quarter was a general slowdown in growth in both the current numbers as well as forecasts. However, this is still healthy growth from a massive base.
While we scratched the surface on the recent tech earnings from a cloud perspective in this note, its time to think about joining the over 1,000 paid subscribers to get the full deep dive on the recent megacap tech wreck and learn what this means for each company, and more broadly, the market going forward!
Until next time. Always Yours. Incessantly Chasing ROI,
-Genevieve Roch-Decter, CFA
P.S. Have you checked our new ALTS and CRYPTO newsletters? Subscribe for free!
What else we Grittin’ On?
HOUSING. US home price fell by the most since 2009 in August. And the deceleration is poised to continue.
CONFIDENCE. The Conference Board's Consumer Confidence Index dropped to a 3-month low in October. The dop was larger than expected.
EUROZONE. Business activity contracted across Europe for the 4th consecutive month. The IMF lowered its 2023 growth forecast for the area to 0.5% from 2.5% in January.
MOJO. An investment firm wrote an open letter to Meta's Zuckerberg urging the company to cut the shit and "get its mojo back". The company has lost $9.4 billion to the metaverse year-to-date.
INFLOWS. The past 3 weeks saw inflows into single stocks in the 99th percentile of history since 2008. Previous such flows have typically been followed by above average returns.
Sources:
https://en.wikipedia.org/wiki/On-premises_software
https://azure.microsoft.com/en-us/resources/cloud-computing-dictionary/what-is-cloud-computing
https://www.wpoven.com/blog/cloud-market-share/
https://www.grandviewresearch.com/industry-analysis/cloud-computing-industry
Disclaimer: The publisher does not guarantee the accuracy or completeness of the information provided in this page. All statements and expressions herein are the sole opinion of the author or paid advertiser.
Grit Capital Corporation is a publisher of financial information, not an investment advisor. We do not provide personalized or individualized investment advice or information that is tailored to the needs of any particular recipient.
THE INFORMATION CONTAINED ON THIS WEBSITE IS NOT AND SHOULD NOT BE CONSTRUED AS INVESTMENT ADVICE, AND DOES NOT PURPORT TO BE AND DOES NOT EXPRESS ANY OPINION AS TO THE PRICE AT WHICH THE SECURITIES OF ANY COMPANY MAY TRADE AT ANY TIME. THE INFORMATION AND OPINIONS PROVIDED HEREIN SHOULD NOT BE TAKEN AS SPECIFIC ADVICE ON THE MERITS OF ANY INVESTMENT DECISION. INVESTORS SHOULD MAKE THEIR OWN INVESTIGATION AND DECISIONS REGARDING THE PROSPECTS OF ANY COMPANY DISCUSSED HEREIN BASED ON SUCH INVESTORS’ OWN REVIEW OF PUBLICLY AVAILABLE INFORMATION AND SHOULD NOT RELY ON THE INFORMATION CONTAINED HEREIN.
No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.
Any projections, market outlooks or estimates herein are forward looking statements and are inherently unreliable. They are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur. Other events that were not taken into account may occur and may significantly affect the returns or performance of the securities discussed herein. The information provided herein is based on matters as they exist as of the date of preparation and not as of any future date, and the publisher undertakes no obligation to correct, update or revise the information in this document or to otherwise provide any additional material.
The publisher, its affiliates, and clients of the a publisher or its affiliates may currently have long or short positions in the securities of the companies mentioned herein, or may have such a position in the future (and therefore may profit from fluctuations in the trading price of the securities). To the extent such persons do have such positions, there is no guarantee that such persons will maintain such positions.
Neither the publisher nor any of its affiliates accepts any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of the information contained herein.
By using the Site or any affiliated social media account, you are indicating your consent and agreement to this disclaimer and our terms of use. Unauthorized reproduction of this newsletter or its contents by photocopy, facsimile or any other means is illegal and punishable by law.
For Full Terms of Use Click HERE. For the Privacy Policy Click HERE.
Gritcapital.substack.com (“Grit”) is a website owned and operated by Substack. Grit is paid fees by the companies that make investment offerings on this website. Be aware that payment of these fees may put Grit in a conflict of interest with the investor. By accessing this website or any page thereof, you agree to be bound by the Terms of Use and Privacy Policy, in effect at the time you access this website or any page thereof. The Terms of Use and Privacy Policy may be amended from time to time. Nothing on this website shall constitute an offer to sell, or a solicitation of an offer to buy or subscribe for, any securities to any person in any jurisdiction where such an offer or solicitation is against the law or to anyone to whom it is unlawful to make such offer or solicitation. Grit is not an underwriter, broker-dealer, Title III crowdfunding portal or a valuation service and does not engage in any activities requiring any such registration. Grit does not provide advice on investments or structure transactions. Offerings made under Regulation A under the U.S. Securities Act of 1933, as amended (the "Securities Act") are available to U.S. investors who are “accredited investors” as defined by Rule 501 of Regulation D under the Securities Act well as non-accredited investors, who are subject to certain investment limitations as set forth in Regulation A under the Securities Act. In order to invest in Regulation A offerings, investors may be asked to fill out a certification and provide necessary documentation as proof of your income and/or net worth to verify that you are qualified to invest in offerings posted on this website. All securities listed on this site are being offered by, and all information included on this site is the responsibility of, the applicable issuer of such securities. Grit does not verify the adequacy, accuracy or completeness of any information. Neither Grit nor any of its officers, directors, agents and employees makes any warranty, express or implied, of any kind whatsoever related to the adequacy, accuracy, valuations of securities or completeness of any information on this site or the use of information on this site. Neither Grit nor any of its directors, officers, employees, representatives, affiliates or agents shall have any liability whatsoever arising from any error or incompleteness of fact, or lack of care in the preparation of, any of the materials posted on this website. Investing in securities, especially those issued by start-up companies, involves substantial risk. investors should be able to bear the loss of their entire investment and should make their own determination of whether or not to make any investment based on their own independent evaluation and analysis.