Blogs -Best Bet for Tech Stocks in 2019? Secular IaaS.

Best Bet for Tech Stocks in 2019? Secular IaaS.


February 08, 2019

Beth Kindig

Lead Tech Analyst

If ever there was a growth story in the next 2-3 years, especially during potential economic uncertainty, then infrastructure-as-a-service (IaaS) is it. This past week, Amazon’s IaaS offering, AWS, reported sales growth of 45% from $5.11 billion to $7.43 billion, with operating income increasing 61% to $2.18 billion up from $1.35 billion. Microsoft’s IaaS offering, Azure, was up 76 percent (same as last quarter) reaching $4 billion in revenue. Microsoft’s overall commercial cloud computing revenue which includes software grew 48 percent to $9 billion. If both companies continue on this trajectory in 2019, then Microsoft will narrow its gap from 3:1 to 2:1 with Amazon.

2018 CLOUD IAAS REVENUES
$26 billion AWS
$10 billion MS

UPDATED PROJECTED 2019 if growth continues at current rate
$16 billion MS
$30 billion AWS

Amazon, Microsoft and Google Revenue Trend Chart

Note: I’ve written quite a bit of analysis over the last few months about the duopoly between Microsoft and Amazon. To quickly summarize, my first analysis discussed the strategic acquisition of Github. My second analysis discussed the great efforts Microsoft has put into become a serious bidder for the Pentagon contract.

Truly, there is plenty of green field for both players. The investment window for the IaaS market is far from over as it took twelve years for the IaaS market to reach $40 billion and it will take only three years to double to $80 million – and this figure is on the low end of estimates.

My newsletter subscribers get this information first. Sign up here.

Here are a few of the projections for this space from various analysts:

  • Amazon’s Cloud Business could reach $71 billion by 2022 with a valuation of $350 Billion (source Jefferies – which tends to be more bullish on AWS than MS).
  • Microsoft’s Cloud Business Could Be Bigger Than Windows by 2021 with $26.4 billion in revenue in 2021 fiscal year vs. $20.3 billion from Windows (source: Keybanc – most estimates on MS are low, which is why there’s still a growth story here)
  • Global cloud IT market will triple between 2015 and 2020 with IaaS being the segment with the largest growth of 27% compared to SaaS growth of 18% (source: Bain and also SoftwareStrategistBlog.com)

Global IT Revenue Chart Growth source: Bain Analysis

IaaS Cloud is Secular

On a micro-level, the tech industry is in a state of transition. Mobile is hitting saturation, social media faces privacy regulations, chip makers are getting hurt in the trade war, and meanwhile, 5G, artificial intelligence, and autonomous vehicles are too nascent to see returns in the near term. This is one reason I continue to hammer on IaaS as a safe, secular bet. Companies are going through a major transition right now by transferring work loads into the cloud.

As these transitions take place, IaaS will be as essential to companies as food, gas and cigarettes are to consumers. The company that has transferred to the cloud cannot exist without budgeting for this operating expense. Meanwhile, the companies who have not transferred to the cloud risk losing on competitive advantages such as artificial intelligence, machine learning, and scaling quickly through server virtualization.

As it currently stands, IaaS is Amazon’s largest revenue segment and Microsoft’s fastest growing revenue segment – although there is plenty of addressable market left for both players. Amazon’s capex spending (which includes all capex; not AWS specific) was at $14 billion in 2018 while Microsoft reported capex of $12 billion. One major drawback is that these are not pure play IaaS stocks which introduces risk from other revenue segments. You can read my follow up analysis on 6 pure play cloud stocks here.

Sign up for Analysis on the Best Tech Stocks

I’m an industry insider who writes free in-depth analysis on public tech companies. In the last 12 months, I predicted Facebook’s Q2 crash, Roku’s meteoric rise, Uber’s IPO flop, Zoom’s IPO success, Google’s revenue miss and more. Be industry-specific. Know more than the broader markets. Sign up now. I look forward to staying connected.

If you are a more serious investor, we have a premium service that offers institutional-level research and entry/exit options. This membership offers a competitive edge in identifying growth opportunities and reducing risk in the tech sector. Learn more here.

More To Explore

Newsletter

Nasdaq100 Levels to Watch for the Next Leg Higher

Knox Ridley, the Portfolio Manager for the I/O Fund, has written an overview of the levels he is watching for the Nasdaq 100 and also why the Dow Transportation Index will help confirm if we see the n

June 11, 2021

Podcast with Motley Fool: I’m Bullish on These Trends for 2021

Recently I joined Tim Beyers and Brian Feroldi on The Motley Fool podcast. In the hour-long interview we discussed cloud stock valuations, trends I’m bullish on, why I thinkZoom VideoandShopifyare the

March 04, 2021

Tech Growth Earnings Review for Q3 2020 - Part 3

In the 3rd part of my Q3 earnings analysis, I review reports from Zoom Video, Okta, Snowflake, Crowdstrike, ZScaler and Elastic. Zoom Video

December 14, 2020

Fiverr: Explosive Growth with a Bright Future

Fiverr has climbed 678% this year. In this analysis, we examine if the growth can continue in the short-term and also post-COVID.  Specifically, our research shows that...

November 19, 2020

Alteryx Stock Price: More Downside Before Taking Off

After soaring 147% to reach an all-time high of $147 per share, Alteryx’s stock price has been on a freefall and is currently trading around $98. Alteryx (AYX) fell vic...

November 22, 2019

Microsoft Earnings Likely to Prove Cloud Isn't Slowing Down

This week, Microsoft’s earnings will shed light on whether the fear over cloud valuations is warranted or not.

October 22, 2019

Why no streaming company will be able to dethrone Netflix

Netflix critics see mountains of debt and bleeding free cash flow. Opportunists see a company with the world’s best track record for beating the odds in disrupting trad...

October 16, 2019

The path to profitability for Uber and Lyft looks more like a dead end

The ride-sharing companies are subsidizing rides and overspending on technology, and soon their very business model may be upended in California.

September 20, 2019

zoom-video-2019-analysis

Zoom Video Communications is a company with a valuation where logic is ignored, and any investor in the stock would need to get comfortable with this. The current valuation of $25 billion comes from a

September 06, 2019

Slack’s missteps have now made the stock a ‘buy’ at the right price

Slack Technologies is the fastest-growing software-as-a-service (SaaS) company of all time and a Silicon Valley favorite, yet the direct public offering (DPO) clearly d...

September 05, 2019

Sign up for Analysis on
the Best Tech Stocks

The I/O Fund specializes in tech growth stocks and offers in-depth research and real-time trade notifications.

We are on social networks


Copyright © 2010 - 2021
Get Free Weekly Analysis on the Best Tech Stocks