2021: The Year of the Cloud

A Banner Year for Cloud

I was reading one of my favorite Substack writers’ (Clouded Judgement) recent post where he brought up some best of breed “cloud businesses” and their success in 2021. This inspired me to dive deeper into this idea and share my thoughts with you all.

As we know, 2020 & 2021 were insane years for most software businesses — rapid revenue growth catalyzed by the pandemic drove valuation multiples to all time highs. However, as of late these multiples have continued their fall from grace.

Something this chart above doesn’t illustrate is the immense success and continued valuation generation cloud businesses have had for Amazon (AWS), Microsoft (Azure), and Google (Google Cloud Platforms).

To put this in perspective — these business segments grew by +43.6% on average year-over-year, with Amazon AWS hitting a $72 billion annual run rate.

Let’s breakdown each company’s cloud business and their expected growth going forward.

Amazon (AWS):

In 2020, I shared on Patreon how optimistic I was about Amazon in 2021 — specifically because of the expected growth of the Amazon Web Services business segment. In 2006, Amazon launched AWS with the intention of providing resizable compute capacity for developers.

Here’s a snippet from their 3rd quarter 2006 earnings call:

During the next earnings call, an analyst asked if AWS would ever generate revenue and if the company had any idea on the timing of that revenue (below).

10 years into its development, AWS was operating at a remarkable $10 billion annualized run rate. To position just how early Amazon was to this idea, here’s a graph from 2016 displaying Amazon’s insane market share. These companies had ten whole years to catch up, and AWS still dwarfed them.

Just so we’re all on the same page here, Amazon had over 30% market share in 2016 — with Microsoft, IBM, and Google representing only ~23% market share combined.

Since 2016, Amazon hasn’t exactly grown their market share — however, they’ve continued to grow their business. This speaks volume toward just how quickly their total addressable market is expanding with the adoption of cloud infrastructure worldwide.

The chart below doesn’t include FY21 — which if it did, we’d see a blue bar extending past a “17500” mark on the Y-axis. This would represent a 7X in quarterly revenue when compared to 1Q16.

Think about that — Amazon grew AWS quarterly revenue by 7X in 6 years to $17.8 billion. During this last quarter, AWS grew by +40% when compared to the same period in 2020. Remarkable. Not just that, but the company grew operating income for their cloud business segment faster than they grew revenue — a clear sign of cost optimization.

Below are a few quotes from Amazon’s earnings call this week regarding AWS:

Brian Olsavsky (CFO of Amazon) was asked what specifically had driven this record revenue growth for AWS — his answer was essentially that Amazon has been planning for a mass migration to “the cloud” for years now and the pandemic was the catalyst needed to cause that.

Brian further explained that because Amazon knew mass migration would happen eventually, when the demand rose — the company already had the marketing, sales, and onboarding infrastructure ready to go.

He also explained that over the last few years, the company has been doing everything they can to ensure their AWS servers would have a shelf life of 5 years vs. 4 years. This is critical to keeping capital expenditures lower in the long run. They’re finally ready to make that switch, which will save them ~$1 billion in 2022.

Looking forward, it’s pretty easy to assume AWS will continue to grow by +15-20% compounded annually through the rest of the decade — putting them around $300 billion in annualized revenue during 2030.

For 2022, Wall Street is modeling for +36% YoY growth.

Wall Street 12-month PT: $4,110 / share

Microsoft (Azure):

The year is 2008 — you’re sitting in the audience of Microsoft’s Professional Developers Conference (PDC). Ray Ozzie, Microsoft’s former Chief Software Architect, takes the stage to announce a new business segment that will eventually grow to over $18.3 billion in annualized revenue.

I found this old press release dated October 27, 2008 that details the launch of Azure.

Throughout the years, Ray Ozzie was eventually known for being the most prominent advocate for delivering software through the web — today we call this “Software as a Service.” You might have heard of it, haha.

Here’s a link to the original “vision” Ray Ozzie shared with the world in 2005 — with the goal of building a disruptive platform that would replicate the design of Microsoft Windows OS, .NET application services and Microsoft Office Suite on the Internet. Today, this is Azure and Office 365.

I included an exert below.

However, despite having such an innovative member on Microsoft’s team, they were unable to entirely bring this vision to life given their at-the-time’s CEO Steve Ballmer hesitation. Eventually, Satya Nadella took over as CEO in 2018 and doubled down on everything mobile and cloud. Then in 2019, Microsoft Azure won the JEDI contract through US Department of Defense with a potential value of $10 billion.

Today, Microsoft Azure is a massive business. The company’s “Intelligent Cloud” business segment described within their 10-Q as their “public, private, and hybrid server products and cloud services that can power modern business and developers.”

Specifically, this includes:

• Server products and cloud services, including Azure and other cloud services; SQL Server, Windows Server, Visual Studio, System Center, and related Client Access Licenses (“CALs”); and GitHub.

• Enterprise Services, including Enterprise Support Services and Microsoft Consulting Services.

This business segment did $18.3 billion in revenue during the final quarter of 2021, representing +26% growth year-over-year. According to their earnings release, Azure-specific revenue increased +46% year-over-year. This +46% growth was incrementally ahead of the Street’s +45% expectations, however, when you take currency exchange into account — they blew away expectations.

To quote a few mentions of Azure in their recent earnings call..

One of the strongest metrics Microsoft reported during the quarter was Azure’s commercial bookings growth — growing +32% year-over-year. This statistic blew everyone’s expectations out of the water. When giving guidance, Microsoft reaffirmed similar growth next quarter.

When asked about the aggressive growth expectations, Amy Hood (Microsoft CFO) said..

Microsoft rightfully believes every market will eventually pivot toward a digital environment, and they want to be there to put the puzzle pieces together when it inevitably happens globally.

12-month Wall Street PT: $371 / share

Google (Google Cloud Platforms):

Amazon launched AWS in 2006 — two short years later, Google launched their App Engine. This developer tool enabling you to run web applications on Google’s infrastructure would soon turn into a massive umbrella of cloud products — making the company more than $19.2 billion in revenue in 2021.

After laying the infrastructure for GCP in 2008, it took Google another 4 years until they officially launched the Google Cloud Partner Program to help migrate enterprise businesses to the cloud.

Upon launching integrations like storage, SQL, .NET, and others, GCP grew like a weed. From 2017 through 2021, Google’s GCP revenue grew at +30% compounded annually — $4.1 billion to $19.2 billion in only 6 calendar years.

During their most recent quarter, Google posted record revenue for their GCP business segment — $5.5 billion.

Despite Google’s GCP business segment not being profitable just yet (-$890 million operating loss this recent quarter) the company is narrowing this loss substantially while investing continually into R&D. There’s no doubt in my mind this will become an incredibly profitable business segment for Google by the end of the decade — in turn, printing cash.

12-month Wall Street PT: $3,454 / share

My Biggest Bets

It’s clear that every single large enterprise will make a digital transformation as we approach the 4th Industrial Revolution. For this to happen, they’ll need continued support and infrastructure — likely choosing the largest providers of said services.

This leaves us with Amazon's AWS, Microsoft’s Azure, and Google’s GCP.

These 3 companies represent nearly 20% of my entire invested capital in the stock market — clearly showing just how big of a bet I’m making here. As valuation multiples continue to compress in the market, I’d imagine the biggest, most profitable companies (AMZN, MSFT, GOOG) will continue to tread along just fine. Regardless of what the market does in the coming 6-12 months, I’m long cloud businesses.

Before I sign off, I wanted to share one more high-level idea that was really hammered home to me while composing this piece.

As we think about where the future is headed, it’s obviously digital. Every single company (that wants to compete in the real world) will eventually pivot toward a digital infrastructure. Assuming developers are continually building upon and tweaking their digital products to be more effective, profitable, and scalable — they’ll need to obtain and interpret user data.

This is exactly what Amplitude (AMPL) is doing for countless companies (below).

For a full breakdown of the company, click the link below. I detail how I discovered, researched, and tested my findings on them. I also share Wall Street’s take.

Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.