☁️State of the cloud Q3 2020☁️

Q3 was an especially interesting quarter for the cloud, mainly due to the ongoing pandemic and the TikTok shenanigans. Hence, I thought I would summarize some thoughts and numbers around it.

The US stock market rallied in Q3 as investors (somewhat naively) shrugged off worries about the rising COVID-19 cases and focused on the economic reopening efforts. With a gain of 11%, the tech-heavy Nasdaq Composite index rallied the highest, followed by the S&P 500 and Dow Jones gaining 8.5% and 7.6%, respectively. The technology sector has played a key role in the quicker recovery of the stock market. In Q3, the Technology Select Sector ETF (XLK), which tracks an index of the S&P 500 technology stocks, rallied 11.7%. Moreover, the ETF has a positive year-to-date return of 32.2% as of today (November 6th) - outperforming the gains of all three major US indexes.

Besides the ongoing COVID-19 pandemic and the subsequent rally of SaaS and cloud infrastructure stocks, the largest tech news in Q3 was the whole TikTok vs Trump debacle. As we all know, the Trump administration views TikTok as a national-security threat, and during Q3 a very unexpected resolution started looking to happen: American database giant Oracle, headed by Trump backer Larry Ellison, would buy a minority stake in the company, 12,5% to be exact for $7.5B according to Bloomberg, to keep it from being banned in the U.S. But to many (including me), the deal not only fails to address the problems it was meant to solve - but it also looks fishy like most of Trump's "deals". However, that's another post for another day.

The whole TikTok debacle resulted in a situation where Oracle undoubtedly paid the most expensive enterprise cloud credits in world history. Any way you want to look at it, Oracle and TikTok were joined together in unholy acquisition matrimony, it was an acquisition equivalent of a forced wedding. Still, Oracle founder Larry Ellison stated in a September 19 press release how TikTok had “chosen” their cloud infrastructure. The statement also made it sound like this “choice” was influenced by Zoom’s decision to move some percentage of its workloads to Oracle’s cloud infrastructure earlier this year (he naturally failed to mention how Zoom also buys cloud services from AWS). We can all take Ellison's statements with different pinches of salt, but the fact of the matter is that Oracle, a nascent player at best in the cloud infrastructure landscape, now can showcase the fastest growing social media network (TikTok) and fastest-growing enterprise software app (Zoom) in their client logo slide. Pretty unexpected.

But does this makes any real difference in the cloud infrastructure market or is it merely noise from smaller fish that missed to jump on the cloud ship in time? I think John Dinsdale, chief analyst at Synergy Research Group, compromised it quite well in a Techcrunch article from October:

"Hypothetically, even if Zoom/TikTok helped Oracle increase its cloud infrastructure service revenues 50% over 12 months, which would be a real stretch, its market share would still be nearer to 2% than 3%. This compares with Google at 8%, Microsoft 18% and AWS 33%"

So a lot of noise from Oracle, but very little actual impact.

Let's take a closer look at how the 3 big behemoths (AWS, Azure and GCP) faired in Q3 2020, courtesy of Iconic Growth.

In Q3, the three behemoth cloud service providers saw strong gains in Y/Y growth. AWS grew by 29%, GCP by 45%, and Azure by 47% - the cloud is without a doubt becoming the key growth driver for all three companies as we look at future value appreciation! If one is looking at investing in any of these three players, I'd suggest that you study closely their cloud numbers and growth.

Regardless of COVID-19 headwinds impacting certain customer segments (e.g. travel and sports), on aggregate, the macro environment has helped support growth for cloud providers. One component of this is a rapid enterprise shift to the cloud to drive cost efficiencies, supporting continued revenue expansion and momentum and an increase of multi-year cloud contracts. All three cloud providers also highlighted significant commitments with new Fortune 50 customers and both Google and Amazon mentioned recent partnerships with various government agencies. All three companies also expressed confidence in on-going momentum driven by accelerated digital transformations across industries, requiring migration to the cloud.

AWS close-up by ICONIC Growth fund

📌 Amazon - the largest cloud infrastructure provider in the world - grew revenue a solid 29% Y/Y on a constant currency basis, ending the quarter at $46.4B in run-rate revenue. AWS usage and backlog remained strong with an increasing number of multi-year contracts, although certain industries more impacted by COVID-19 experienced notable volatility.

📌 With several new product announcements, including five new AWS Wavelength Zones and a focus on developer tools, AWS successfully attracted a variety of new customers and partnerships in Q3. Notably, Global Payments is partnering with AWS to manage issuer processing, totaling ~27B transactions per year. In addition, AWS signed contracts with Moderna, Jack-in-the-Box, Weta Digital, Indeed, Arcelik, Best Western International, and Carrier. Overall, AWS had a healthy quarter of growth and is seeing continued momentum with an increasing backlog of multi-year deals.

Azure close-up by ICONIC Growth fund

📌 Despite a slightly slowed growth of 47% Y/Y this quarter, Microsoft Azure started their fiscal year on strong footing. Innovating across their full modern tech stack, Microsoft was able to match heightened demand due to accelerated digital transformation

📌 Following a historic pattern of impressive earnings, Microsoft continues to see strong Y/Y growth to kick off their fiscal year. Driven by consistent execution across core annuity sales motions and and strengthened customer relationships, Microsoft continues to excel. Microsoft Azure reported a 47% increase in earnings, down just 3 points from 50% Y/Y in Q4 FY2020. Looking forward, Azure’s future growth trajectory is expected to be impacted by lowered consumer spending and transactional weakness due to COVID-19, a strong FY2020 comparable, and volatility from securing more long-term Azure contracts focused on long-term partnership rather than immediate profitability.

📌 Microsoft Azure looked to expand in every facet during Q1 FY21. This included the launch of new data center regions (now totaling 66), addressing challenges for current partners, and securing more large, long-term contracts with a variety of companies including PepsiCo, BP, Shell, Airbus, Volkswagen, AT&T, and Verizon. They also looked to new verticals, with a particular focus on healthcare. Microsoft’s investment in Azure’s vast hybrid capabilities, including Azure Arc, SQL Edge, Cognitive Sciences, and AI models, points to a commitment to their customers and the developer-wide landscape.

GCP close-up by ICONIC Growth fund

📌 Google Cloud saw yet another quarter of strong growth, reporting $3.4B in revenue at an accelerated Y/Y growth rate of 45% — a 2 point increase from Q2. Although not disclosed, GCP was reported to have a growth rate meaningfully above that of Google Cloud overall. This momentum is expected to continue into Q4 with customer demands for data analytics, enterprise cost savings, and an emphasis on collaboration in the new remote world.

📌 Pleased with the GCP revenue and outlook, Management pointed to key differentiators that have contributed to the success of Google Cloud: unique industry solutions, strong underlying technology, advanced data analytics, and AI capabilities. This has helped Google Cloud secure new customers and strengthen relationships across various industries and verticals. Notably, Nokia and Google Cloud are collaborating to migrate 30+ data centers to Google Cloud infrastructure.

📌 Google continues to see ongoing strength in GCP performance, in part, reflecting their ability to meet customer demands for data analytics and products that support the shift to a remote work environment

Summarizing it all, the cloud infrastructure market kept growing at an even surprisingly strong pace in Q3, as the pandemic continued to push more companies to the cloud with offices shut down in much of the world. Synergy Research reported revenue growth of 33% year over year, up to almost $33 billion for the quarter.

It is quite clear that COVID-19 has provided an added boost to a market that was already developing rapidly.