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Cracks are forming at the seemingly once-invulnerable top of the NASDAQ as Wall Street realizes that the FANG group - Facebook Inc (NASDAQ: FB ), Amazon.com, Inc. (NASDAQ: AMZN ), Netflix, Inc. (NASDAQ: NFLX ) and Alphabet Inc (NASDAQ: GOOGL , NASDAQ: GOOG ) - were never going to work hand in hand with the rest of the computing giants, much less each other. The recent launch of new cloud computing systems from Microsoft Corporation (NASDAQ: MSFT ) only shows how fiercely the competitive tech tides can turn.
For one, MSFT has scale and a home-court advantage on its side. Its commercial cloud-driven data solutions are racking up $15 billion per year in revenue, and where the new Azure generation is concerned, that cash flow is growing 90%-100% year over year.
As the upstart, AMZN has done extremely well rolling up the easy accounts that really only need to share storage space on the company's vast server farms. This is the low end of the cloud, though, selling access to computing infrastructure as a utility. And while those easy pickings have helped grow Amazon Web Services (AWS) to roughly the size of the Microsoft cloud, 42% growth in that space isn't even half of what Azure has been producing.
Believe It or Not, Amazon Can't Catch Microsoft
Run the numbers and you'll see that it would take a dramatic upset for AMZN to pull ahead of MSFT in terms of raw cloud cash flow. While the bases are comparable, one company is reaping big buzz for half the growth of the other.
Don't get me wrong - I love AMZN as the great retail disruptor, but renting server space is a marginal sideshow in the face of that main event. Even if this is where the sizzle is for Wall Street, management is focused on innovating elsewhere. They don't have a lot of huge game-changing plans for the cloud right now.
MSFT has a little more ambition in this space, though. Azure has always had the upper hand when it comes to layering operating systems and other software on top of the servers that cloud customers rent. Since that's where the sweetest part of the value chain happens to be, in terms of account wins and profitability, every win for Azure has a little more weight than one for AWS.
Slow and Steady Seems to Be Working for MSFT
This week's announcement that Azure is now available on third-party servers slices the cloud even tighter in MSFT's favor. Currently, organizations that want, or need, to maintain their own data farms can buy into that sweet software side without having to actually run anything on MSFT's infrastructure. They weren't dumping their private hardware for AWS anyway, so this is a path into the cloud - the Microsoft cloud, Software-as-a-Service (SaaS) no matter who owns the machines - that bypasses the hardware-centric AWS proposition.
In theory, cloud vendors like Amazon could even abandon the software side by opening their customer machines to Azure as well.
That's a scenario where MSFT wins. Meanwhile, a conservative estimate is that applications and business processes already represent twice as much of a share of overall cloud spending as simply renting the servers themselves.
Infrastructure is a commodity, simple and plain, and it generally only gets cheaper as the business grows. Software adds value, expanding as fast as innovation allows. At the rate MSFT is moving here, it looks like even AMZN is standing still.
Hilary Kramer is the editor of GameChangers, Breakout Stocks, High Octane Trader,Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
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