I call the leading cloud stocks the “Cloud Czars,” although most reporters still label them “big tech.”
All of them spent the last decade building networks of huge cloud data centers. These now dominate the global economy. They’re essential to getting through the coronavirus from China.
But all these stocks have been hurt by the virus. Only two are now worth $1 trillion. At the start of the year four were. The smallest of them recently lost its position as the 5th most valuable U.S. company to Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B). Its market capitalization even fell below that of Alibaba (NYSE:BABA).
But don’t let that stop you from buying it.
Cloud Stocks Diverge: Cash and Charge
There are two reasons that not all cloud stocks are equal today.
These are cash and the ability to charge for services.
Apple is down just 13% over the last month thanks to its enormous cash balance. This stood at over $100 billion last December. It is also helped by the fact that people still buy and use iPhones. Services are the fastest-growing part of its revenue mix, although they still represent just 14% of the total.
Microsoft is now worth slightly more than Apple and seems the stronger of the two cloud stocks. While it had just 40% of Apple’s revenue, less than $37 billion in its most recent quarter, it came almost entirely from services. Microsoft was able to send nearly 38% of revenue to the net income line in the December quarter. Its Azure revenues, $11.9 billion, nearly equaled the $13.2 billion for Windows, even with Surface laptops and the Xbox thrown in.
The strongest of the cloud stocks by far is Amazon. Its shares are down only 3% in the last month, and they’re still up for the year. Amazon hasn’t just poured money into cloud, but into warehouses and delivery vehicles. It had $50.5 billion in product sales during the last quarter, generating nearly $13 billion in free cash flow. The company is still expected to maintain its earnings pace for the March quarter, which given the virus would be an amazing achievement.
Ads Fail Me
The problem for Alphabet and Facebook is that they’re dependent on advertising.
While the two companies have destroyed the journalism business while doing no journalism, that’s no longer good enough to keep cash flowing.
Alphabet is, despite its “other bets,” still basically Google. It’s down 18% for the last month. The “earnings whisper” is that net income will fall 23% from the fourth quarter, to $11.89 per share. Google has been pouring billions into re-selling its cloud over the last year, but it still has less than 10% of that market.
Facebook is completely dependent on advertising. That’s the only business model its services have. Analysts see its earnings cut by over one-fourth from the Christmas quarter, seen as an earnings miss.
Facebook usage is skyrocketing, but it is “just trying to keep the lights on” because advertising has cratered. The company began aggregating news last year, after its willingness to accept anything on its networks was blamed for electing President Donald Trump. It is now trying to fight lies. But its efforts to diversify into digital money, through Libra, are now deemed a failure.
The Bottom Line on Cloud Stocks
Try to imagine what this crisis would be without the dominant cloud stocks.
Think of this world without the internet to work on, without e-commerce to shop from, without social networking to connect with. Tens of millions of people would still be going to work today. Tens of millions more would still be shopping today. Infection would be out of control. Social distancing would be impossible without social networks.
The Cloud Czars are all showing their value to society. When the crisis passes, they will be stronger than ever. Even Facebook. They may be less profitable, more tightly regulated, but these cloud stocks are the best places for you to have money today.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL, MSFT, BABA FB and AMZN.