Microsoft, Amazon Lead the Way in the Cloud

Rodney Nelson: We took an in-depth look at the burgeoning public cloud market, with a primary focus on the vendors shaping the infrastructure-as-a-service landscape. This market is characterized by vendors such as Amazon and Microsoft that make hyperscale compute and storage services available on-demand to its customers, enabling enterprises to pay only for the IT resources that they consume.

One of the key takeaways from our research revolved around how these firms develop economic moats around their infrastructure businesses. Given the unique level of capital intensity in the public cloud market, we believe firms that can achieve scale will benefit from a unique cost advantage, as these companies can spread a relatively fixed cost base across a wide swath of customers. Ultimately, this allows cloud vendors to continue to pass savings on to its customers while maintaining healthy levels of profitability.

Second, we believe leading vendors will benefit from leveraging intangible assets that are built around intense knowledge of managing hyperscale data centers and building premium services portfolios. These services revolve around themes such as IoT, artificial intelligence, machine learning, and serverless computing. Firms that can build out a robust set of premium services will ultimately stand a better chance of attracting and retaining customers.

As the market stands today, we believe Amazon and Microsoft represent the two most well-positioned public cloud vendors. Each company has made the requisite capital investments to build out global infrastructure, while both offerings provide unique premium services to attract enterprise customers. From a valuation standpoint Microsoft appears to be the most undervalued company.