The cloud is such a huge market that even keeping up can make a company wealthy. Synergy Research estimates the total cloud infrastructure and services market was worth roughly $70 billion in 2018, with year-over-year growth of 49%. But leadership looks fixed. One-third of the market is with Amazon (NASDAQ:AMZN), half that much with Microsoft (NASDAQ:MSFT). Everyone else is scrambling for what’s left. The companies in third and fourth, Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and International Business Machines (NYSE:IBM), are behaving like losing sports teams. Google Cloud has a new boss, Thomas Kurian from Oracle (NYSE:ORCL). IBM made an even more drastic move, buying Red Hat (NYSE:RHT) for $34 billion.
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But is it too late for IBM stock and GOOGL stock? Given the continuing growth of the cloud market and cloud stocks, does it even matter?
Google: This Can’t Be Happening!
Losing at cloud is galling for Google, which practically invented the technology to run its search business. Its mistake was failing to get into cloud re-sale quickly or to treat cloud re-sale seriously enough.
Google is now as serious as a heart attack with Kurian, who wants an army of salesmen beating the bushes for business, after managing a 35,000 strong sales team at Oracle.
Predecessor Diane Greene increased that salesforce by 400% during her three years in charge. Kurian told a Goldman Sachs conference recently he wants every enterprise on Google Cloud to have someone to call when they have infrastructure problems.
Already, Kurian said Google has doubled its count of Cloud contracts worth over $1 million, and is now doing $100 million deals. But Google has yet to describe the size of its resale business, except to say it’s over $1 billion.
The problem is GSuite, Google’s collection of business tools, aren’t as good as Microsoft Office. The Exchange email system is more flexible than Gmail. Google Docs doesn’t hold a candle to Microsoft Word, and Google Slides can’t challenge Microsoft Powerpoint. While Google did increase its cloud market share by 1% in 2018, Microsoft’s gains were three times that.
IBM: Put It All on Red
In paying $34 billion for Red Hat, IBM spent the equivalent of one-fourth its market cap on a company doing $3 billion of business last year. IBM’s market cap is $123 billion on sales of about $80 billion.
Even before the deal closes, IBM is going all-in on Red Hat’s strategy of “hybrid cloud.” Here, enterprises own their own cloud data centers, but also run services in public clouds.
The key is containers, a technology that is supposed to put a program and its data onto a cloud the way a shipping container goes on a train or boat. To get the strategy rolling, IBM is containerizing its Watson AI system, so it can run on any public cloud or in a company’s data center, not just on IBM hardware.
The level of commitment will only become clear later this year, as Red Hat is integrated into IBM. For now, IBM is promising Red Hat nothing more than autonomy.
Naming Red Hat CEO Jim Whitehurst as successor to IBM CEO Ginni Rometty, who has reached the company’s traditional retirement age of 60, would be more transformative. It would bring Red Hat’s “open” culture, described by Whitehurst’s 2015 book The Open Organization, to the center of corporate power.
The Bottom Line on GOOGL Stock and IBM Stock
Even if GOOGL stock and IBM stock can’t gain major market share against Amazon, merely growing in line with the market assures both stocks are winners.
For GOOGL stock, winning would be nice, but its public services already represent a $100 billion business.
For IBM stock, it has no public services to fall back on. Whether or not Whitehurst becomes its CEO, IBM is already committed to the cloud.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT and AMZN.
