Why Microsoft Stock Could Overtake Amazon on Cloud Infrastructure

The cloud infrastructure market is expected to reach $83.5 billion by 2021, up from $40.8 billion in 2018. Amazon Web Services was launched in 2006, which means it took twelve years for the infrastructure-as-a-service (IaaS) market reaches $40. billion – but it will only take three years for the next $40 billion to accumulate. Therefore, the investment window for cloud infrastructure stocks is far from over.

The IaaS segment is currently Amazon’s most profitable source of revenue, accounting for 55% of its quarterly operating profit, and is also Microsoft’s main growth driver at 89%. Considering these are two of the three companies vying for America’s Most Valuable Company, it’s easy to see why IaaS could be the determining factor in who stays in that position. AWS has a tremendous lead in cloud infrastructure with estimates of $26 billion. in sales last year compared to Microsoft’s $10 billion.

However, Microsoft made a major strategic acquisition last month that will reduce its position in second place – and I predict that this specific acquisition will be a main driver that propels MS into the top spot in the next 2-3 years. Before discussing the acquisition, I think it’s important to provide an overview of the IaaS segment.

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Brief overview of IaaS cloud stocks

Gartner’s analysis pushed Oracle and IBM out of the leader quadrant this year, while placing Google Cloud in third place behind AWS and Microsoft. For all intents and purposes, these are the three cloud infrastructure companies that remain for serious equity investors after a period of fierce consolidation. At one point, Amazon held more market share than the last 14 cloud infrastructure companies combined. It now holds the market share of the bottom 5 companies combined. This reflects the growth of Microsoft and Google, as the territory that Amazon lost was mainly gained by MS Azure and also Google Cloud Platform (GCP).

AWS has a remarkable lead at 33% of the market, with Microsoft at 13% and Google at 5-6%. These margins explain why Amazon is showing 40% growth while Microsoft is showing 98% growth – there’s simply more territory MS can gain as a second-place entrant. GCP claims the strongest growth because its revenues are low enough to post these gains.

Needless to say, current revenues are not a strong indicator of who will capture the projected $40 billion growth over the next three years. In fact, I think AWS will have its toughest years ahead because Microsoft’s sole focus has been to grow Azure, and that strategy will be reflected in earnings between 2019 and 2022. AWS is the most mature provider of this category, but Microsoft has a deeper experience of strategic IT dominance. The effort with which Microsoft is driving adoption of .NET CORE and Azure is, surprisingly, not something we see with AWS (more on that below).

To some extent, this reason could easily be explained by Amazon’s growing attention. The company may be too distracted by the growth of its dominance in e-commerce, such as Prime deliveries and also Prime OTT streaming, as well as the acquisition of Whole Foods, as well as its plans to disrupt the health sector and the connected home. It’s easy to see how Amazon might not focus on the strategic investments that the competitive cloud infrastructure market will demand. Microsoft, on the other hand, is putting all of its weight behind IaaS, and the next two years will be interesting to see how that plays out.

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Microsoft’s strategic move to acquire the world’s largest open source repository

Microsoft’s drive to become the leader in cloud infrastructure was demonstrated last month with the $7.5 billion acquisition of Github, which is a repository for developers to upload projects and files. There are 28 million active developers collaborating on GitHub. In other words, every developer in the world is on GitHub. In fact, GitHub’s user base is larger than the total number of developers worldwide, which is an impossibility pointed out by the founder last year, proving the platform’s ubiquity.

“Git” refers to version control systems, which tell developers about an open version of all project changes (like writing code), which is stored in a central repository. Collaboration and sharing are at the heart of open source software, and Github provides a social environment for this to happen. There’s a ton of innovation happening here, and almost every developer hosts their code and projects here for the world to see (or even for employers to review in job interviews). Developers can fork a project or split a project by creating a new project from an existing project. Or they can issue a pull request for the original developers of a project to incorporate new code.

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Ironic is the best word to describe Microsoft’s venture into open source technologies and repositories. At one time, the company was hated by the developer community for its closed standards, as founder Bill Gates adamantly believed that software should be proprietary. In the late 90s, leaked documents showed that Microsoft had tried to contain the open source movement and prevent Linux from competing with Microsoft software by locking customers into proprietary protocols. (Linux is the free and open source software operating system that was launched in the early 90s and Android is based on today; Windows is the antithesis of this operating system).

Developers are looking for open source environments so they can learn from each other and further support innovation. Today, AWS excels in open source development because it was an early proponent of Linux. However, Microsoft is attempting a full eighty in embracing the open source community, and if MS is successful, it will pay dividends for Azure as it takes on AWS.

This adventure in open source advocacy has been planned for some time. Over the past few years, Microsoft has become the #1 contributor on Github with 2 million projects, which helps position Microsoft as an advocate while evangelizing the .NET framework and the .NET CORE that runs on Windows, MacOS and Linux. Microsoft now claims that 40% of Azure virtual machines run on Linux.

Additionally, MS acquired Xamarin, the leading mobile app development platform, two years ago. The tools help developers navigate the different programming languages ​​required by different platforms, such as iOS and Android on native web apps, or a mix of the two with 75% of the code reusable. This significantly reduces development time and resources, and also demonstrates that MS is ready to host and support competing operating systems to win on cloud infrastructure.

To take with: Microsoft woos developers because they are the primary decision maker on which cloud service a business will use. Current MS Azure customers are at the enterprise level, such as Fortune 500 companies. Microsoft’s strength is that most enterprises at this level have a large investment in MS products, and it is easier to go with MS because that’s what they know, and the transition is easy because IT won’t need to be trained on AWS or Google Cloud.

However, Microsoft’s glaring weakness is open source, and the roughly 28 million developers who are on smaller teams and socialize on Github, are decidedly open source. For $7.5 billion, Microsoft did what any great company should do: acquire to remedy your weakness.

Xamarin and Github are highly strategic acquisitions. Microsoft paid 25 times the value of Github, which has around $300 million in revenue. Alphabet was also interested in buying Github, according to inside sources.

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