If You’re Betting on Tech, You Need to Own These Cloud Czar…
I have been using the phrase “Cloud Czars” a lot this year, but many investors don’t know what I mean or why they should care.
The Czars are Apple Inc. (NASDAQ:AAPL), Amazon.com, Inc. (NASDAQ:AMZN), Microsoft Corporation (NASDAQ:MSFT), Alphabet Inc (NASDAQ:GOOGL), and Facebook, Inc. (NASDAQ:FB).
Between them, the Czars were worth $3.68 trillion as the stock market opened May 23. The total market cap of the Dow Jones Industrials at the end of 2017 was $6.87 trillion.
But it is not just market cap that distinguishes the Czars, the oldest of which is Microsoft at 43, from the rest of the market. It’s not even profit or their software technology.
It’s infrastructure that makes a Cloud Czar. These five companies dominate delivery of so-called “hyperscale” data centers, cloud centers, which represented $27 billion in capital spending during the first quarter of 2018.
The Era of Cloud
The 2010s will go down in history as the “era of cloud” and these five companies dominate it.
They earned their status by seeing this future coming and investing in it. Even early in this decade it cost $1 billion in spending each quarter to play the cloud game.
This ante proved too rich for AT&T Inc. (NYSE:T), despite billions in subsidies from government for maintaining universal last-mile service.
It was too rich for International Business Machines Corp. (NYSE:IBM), even though it was the only way for it to play in the “Great Game” of computing it once invented. Rather than invest, they chose to maintain dividends, and their shareholders suffer for it.
The capital needs of cloud shook out telecom companies, computing giants, and cable giants, because playing the game meant investing billions of dollars well ahead of demand.
Google helped create the cloud because it needed capacity to run its search engine. Clouds are server farms that can be addressed as a single large machine, using techniques of distributed processing and virtual operating systems, on cheap hardware, with open source software.
Google combined these innovations from the 1990s because it had to. Amazon also had to, to run its ecommerce operations. But Amazon, which was already renting its fulfillment and delivery infrastructure to smaller stores, decided to rent cloud, too, as Amazon Web Services.
The game was afoot.
Microsoft decided to follow Amazon in 2014, the decision marked by the promotion of Satya Nadella to its CEO slot. Facebook got in even earlier, in 2012, before it could afford to, as CEO Mark Zuckerberg saw it as the only way to become independent of Amazon.
Apple was the last to join, switching from using third-party clouds to its own data centers to grow its vast services revenue.
Building out their cloud capacity made the Cloud Czars dominant. Not only are clouds the cheapest, most scalable form of computing, but by building fiber networks to connect data centers the czars have built a private “cloud Internet” on top of the existing internet, a faster, more intensive network on top of everything that came before.
Thus, Cloud Czars not only have control over their own operations, but those of nearly everyone else as well. The czars operate at global scale, with the capacity to enter, and dominate local markets practically at a whim. So can companies that just commit to using this capacity, like Netflix Inc. (NASDAQ:NFLX) and Salesforce.com Inc. (NASDAQ:CRM)
At the start of this decade Apple was worth under $200 billion. So was Microsoft. Google was worth around $180 billion. Amazon was worth $60 billion. Facebook didn’t even go public until 2012.
From $640 billion to $3.7 trillion in 8 years, the Cloud Czars have gone from playing the Great Game to owning it. For investors buying the Cloud Czars has been a long, glorious ride.
It’s not over yet. In many ways, as cloud software is adapted to artificial intelligence applications, it has barely begun.
It’s good to be a Cloud Czar, and you need to own them.