The Cloud Wars Could Just Be Getting Started. Here’s Why Amazon Will Dominate.

Spending on public cloud solutions is on the rise, and Amazon is well-positioned to benefit.

In July 2021, Amazon ( AMZN -0.88%) founder Jeff Bezos officially transitioned out of an active executive role and handed the CEO job to Andy Jassy.

Jassy, who previously ran Amazon Web Services (AWS), recently published his first shareholder letter since taking the top job. Unsurprisingly, it included several nods to the growth in AWS and its position in the cloud computing landscape. Although the company faces competition from other big-tech leaders such as its FAANG cohorts , Apple and Alphabet , Amazon appears well-positioned for long-term growth. Rising demand in the cloud

IT departments are responsible for employing important business protocols revolving around cybersecurity, network connectivity, monitoring company-issued devices, and more. The past decade saw the more prominent companies adopt a cloud-first strategy and transform their digital services from on-site networks to cloud-native solutions. However, the COVID-19 pandemic accelerated that trend, with companies of all sizes becoming more agile as employees began working from home .

Cloud computing is not necessarily a new concept. However, data is increasingly becoming an integral component driving business decisions for corporations. Amazon, Alphabet, and Microsoft , in particular, have all benefited from the rising need for public cloud services. In essence, big tech is facilitating infrastructure-as-a-service in the form of server virtualization, thereby alleviating the need to invest heavily in capital expenditures such as physical server racks.

Technology research firm Gartner published a report in November 2021 about the rapid increase in cloud IT investments. “The cloud was able to demonstrate that you can continue to run your business globally, during a pandemic with minimum glitches, when employees have to shift to work from home practically overnight,” Milind Govekar, Research VP at Gartner, said in an interview with TechRepublic.

When it comes to quantifying the potential of the cloud, Gartner believes that 85% of companies will implement cloud-first playbooks by 2025. Furthermore, research suggests that 95% of digital workloads will be deployed on the cloud by 2025, up from just 30% in 2021.

These bullish forecasts are congruent with Jassy’s sentiments. During a recent interview with CNBC, Jassy suggested that “95% of the world’s IT spend is on-premises and not in the cloud.” Given the underinvestment in public cloud infrastructure, Amazon appears well-positioned to benefit from increasing IT budget tailwinds. Image Source: Getty Images Best-in-class financial profile

A great way for investors to visualize the encouraging trends in cloud spend is to analyze the financial profile of Amazon’s cloud segment versus its competition. For example, in 2021, Amazon’s cloud unit revenue rose 37% to $62.2 billion. In 2020, its cloud revenue grew 30% to $45.4 billion.

By comparison, Alphabet’s cloud business, Google Cloud Platform, grew by 47% to $19.2 billion in revenue in 2021. For 2020, Google Cloud reported $13.1 billion in revenue, a 46% increase from 2019.

Although it is growing faster than Amazon’s cloud business, it is essential to note that Alphabet’s cloud unit is not yet profitable. In 2021, Google Cloud’s operating loss was $3.1 billion, narrowing from a loss of $5.6 billion in 2020. By contrast, Amazon has maintained 30% operating profit margins in its cloud segment over the last two years, reporting $18.5 billion in operating income from the cloud in 2021 alone. What does Wall Street think?

Lately, some notable Wall Street investors have been praising Amazon specifically for its dominance in the cloud . Among them is Dan Loeb, the founder and CEO of hedge fund Third Point. Loeb recently wrote a letter to his clients in which he outlined the extent of the unrecognized value in Amazon, with particular emphasis on the cloud.

As of this writing, Amazon’s market capitalization is $1.5 trillion, which Loeb estimates could be up to 40% undervalued . Josh Brown, the CEO of Ritholtz Wealth Management, echoed Loeb’s sentiment during a recent interview on CNBC when he asserted that AWS has the potential to be worth between $500 billion and $700 billion as a stand-alone company.

Toward the end of his interview with CNBC, Jassy hinted at his and Bezos’ bright outlook about the future, stating, “I mean, we’re so early in these areas that I think we both share a lot of optimism that there’s an opportunity to change a lot of customer experiences over a long period of time.” Investors should be encouraged that the former chief of AWS is now leading the entire company and has explicitly referenced the cloud as a major catalyst that he expects to propel its […]

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