Cloud Monsters - Spooky Results
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Cloud Monsters - Spooky Results
Google, Amazon, and Microsoft Cloud divisions show softness
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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
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