Two facts about the first quarter had some cloud mavens going "hmmm?" The first was the Amazon (NASDAQ: AMZN ) quarter. Operating income from Amazon Web Services (AWS), its cloud, rose more than 50% year-over-year, from $1.4 billion to $2.2 billion. Growth slowed but profitability rose sharply.Source: Shutterstock
The second was a press release from Synergy Research, which follows the cloud or "hyperscale data center" market. It showed that capital spending by all cloud providers fell 2% from a year ago.
Spending for the last four quarters, at $116 billion, is still 22% ahead of that for the previous four quarters. Synergy called this a "breather." It blamed Alphabet's (NASDAQ: GOOG , NASDAQ: GOOGL ) $2.4 billion purchase of Manhattan real estate for causing a one-time "blip" in last year's numbers. Google's real estate purchases were lumped in with other capital spending.
Take that out and we're fine. Don't panic.
A Mature Market
What the figures really show is that cloud is a mature market.
The leaders in that market, what I call the "Cloud Czars," are established. You know their names: Apple (NASDAQ: AAPL ), Microsoft (NASDAQ: MSFT ), Amazon, Google and Facebook (NASDAQ: FB ). China has its own version of the Czars, Alibaba Group Holding (NASDAQ: BABA ), JD.Com (NASDAQ: JD ), Tencent Holdings (OTCMKTS: TCEHY ) and Baidu (NASDAQ: BIDU ).
Profits are now rolling in from this investment. Any slowdown in investment is money for the bottom line. The bottom line for the Czars is about to get fat.
But companies that haven't achieved their cloud ambitions are only going to be handmaidens to the Czars. The door has slammed shut on International Business Machines (NYSE: IBM ) and Oracle (NASDAQ: ORCL ), on AT&T (NYSE: T ) and Verizon Communications (NYSE: VZ ). These companies can't overcome the Czars' market cap until computing changes again in some fundamental way.
An Analyst's View
John Dinsdale, chief analyst and managing director of Synergy, says the basic cloud drivers haven't changed. The big profits are in leasing capacity. Cloud infrastructure revenues during the first half of 2019 were 42% higher than in the same period in 2018.
The exception to the growth story is in mobile communications, Apple's business, where service provider revenues seem to have topped-out. Apple was the only one of the Czars that didn't increase capex at a double-digit rate during the quarter. Search-based advertising, e-commerce, social networking and software as a service remain strong markets.
Growth may appear to slow this year because of the law of large numbers, which is that big numbers grow more slowly than small numbers. Synergy counts 458 cloud data centers around the world today, with over 140 more in various stages of planning or construction.
"Do we have enough cloud capacity? I don't think that we're even close. There are certainly more efficiencies that could be squeezed out of existing infrastructure, though the hyperscalers have a pretty good track record of running lean and mean," Dinsdale added.
The Bottom Line on AMZN
The 2010's have been the "decade of cloud." For the clouds, every week has been "Infrastructure Week."
Now the decade is ending.
Clouds have transformed every industry, not just computing. Those companies that took the risk at the start of the decade, that seized the opportunity, created trillions of dollars of market cap for their investors.
The 2020's will be different. Clouds are becoming application platforms for huge jobs in biology and fighting climate change. Clouds will also create new opportunities at the network edge, automating daily life, providing intelligence in what are inanimate objects today.
"We are not going to see the 2018 capex growth rates again. Ever," Dinsdale concluded. "But the demand for ever-increasing hyperscale data center capacity is not going away."
Dana Blankenhornis a financial and technology journalist. He is the author of a new environmental story, Bridget O'Flynn and the Bear, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org follow him on Twitter at @danablankenhorn . As of this writing he owned shares in MSFT, AMZN and AAPL.
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