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Cloud growth skyrockets in Q3 as COVID-19 continues to accelerate demand


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Cloud growth skyrockets in Q3 as COVID-19 continues to accelerate demand

The cloud-computing market picked up more momentum in the third quarter as companies continue to migrate their workloads to digital formats during the pandemic.

All of the major cloud providers reported year-over-year revenue growth, touting lucrative new contracts and renewals.

Third-quarter revenue at cloud market leader Amazon Web Services Inc., for instance, grew by 29% year over year to $11.60 billion, consistent with its 29% growth in the second quarter. The cloud provider accounted for more than $3.50 billion of parent company Inc.'s nearly $6.20 billion third-quarter operating income.

On the company's Oct. 29 earnings conference call, Amazon CFO Brian Olsavsky highlighted the recent business wins at AWS. However, he also cautioned that there are still some sectors that are down due to the pandemic, such as hospitality and travel.

"I would say that the majority of the companies, though, are looking for ways to cut down on expenses," Olsavsky said. "Going to the cloud is a good way to cut down on expenses long-term."

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Amazon Web Services' closest competitor, Microsoft Corp.'s Azure, also gained momentum in the third quarter. While the company does not disclose exact Azure numbers, it reported that the cloud platform's revenue grew 48% year over year in the September quarter, up from 47% year-over-year growth in the prior quarter. The intelligent cloud segment, which includes Azure as well as server products, saw the best performance of Microsoft's three primary segments, with third-quarter revenue up 19.7% year over year to $12.99 billion.

"Azure has a really strong set of tools for software development teams, and it is emphasizing data services in its hybrid cloud offering," said Jean Atelsek, an analyst covering the cloud transformation sector at S&P Global Market Intelligence's 451 Research unit. "On the earnings call, there was a lot of discussion about large long-term Azure contracts, which, given the large share of enterprise workloads that have yet to migrate to cloud, is a positive sign."

Another player in the market, Alphabet Inc.'s Google Cloud, has increased transparency with its revenues since the fourth quarter of 2019, and will break out the Google LLC cloud platform as a separate reporting segment in the fourth quarter of 2020. It will also provide full-year results for 2018, 2019 and 2020.

"We'll be providing not just the revenue disaggregation data that we expanded earlier this year, but we will be adding operating income for each of our segments, which we think is the most relevant data," Alphabet CFO Ruth Porat said, adding that the company is "investing aggressively in cloud."

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Google Cloud's revenue grew 45% year over year to $3.44 billion in the third quarter, up from 43% year-over-year growth in the second quarter.

Analysts cheered the unit's performance as well as Alphabet's decision to be more transparent with its results, with more than 20 increasing their price targets on the company's stock.

"We believe Google's decision to further break out Cloud reflects how different Cloud is from the other businesses, and may suggest it is marginally profitable on a GAAP operating income basis," wrote JPMorgan analyst Douglas Anmuth, who raised his price target on Google's stock to $1,870 from $1,770 with an "overweight" rating.

Raymond James analyst Aaron Kessler, who also increased his price target on Google's stock to $1,800 from $1,700 with an "overweight" rating, said the Google Cloud revenue breakout "should give investors more comfort into the level of investment in the segment, as well as more clearly elucidate the margins in the company's core advertising business."

International Business Machines Corp.'s cloud business, meanwhile, served as a bright spot in its own third-quarter earnings. The company's cloud and cognitive software segment jumped 7% year over year to $5.55 billion, while its other segments, global business services and global technology services, saw declining revenues.

Oracle Corp. also experienced a similar trend with its cloud revenue growth for its most recent quarter, which ended Aug. 31 instead of Sept. 30. The company's cloud services and license support segment, which includes Oracle's subscription business as well as licenses and support services for cloud and on-premises IT environments, grew revenue 2.1% year over year to $6.95 billion. The segment's year-over-year revenue growth in the previous quarter was below 1%.

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