Silver Linings in Big Cloud Spending

Amazon, Google and Microsoft are spending billions to stay competitive in the cloud, with shareholders cheering them along. That is good for their suppliers.

By Dan Gallagher

April 27, 2015 12:46 p.m. ET

It used to be said that nobody ever got fired for buying IBM. These days, it seems you can’t get fired for spending a lot on the cloud.

That is the easiest takeaway from the latest set of results from the so-called “hyperscale” cloud-service providers: Amazon.com, Google and Microsoft.While these three have very different core businesses, all have been pouring billions of dollars into data centers, equipment and software to expand their cloud-services businesses. And all three are being rewarded by investors for it.

Amazon’s capital expenditure in the first quarter was $871 million; it picked up another $954 million in property and equipment under capital leases. Microsoft’s capital expenditure was $1.4 billion, while Google’s was $2.93 billion.

This adds up to slightly more than $6 billion, up about 15% year over year. Not all of that spending was specifically in the cloud-services businesses of the three companies—they don’t break down that detail—but all have characterized cloud services, data centers and related technology as major areas of investment. Facebook, meanwhile, is also a big buyer of this equipment and says capital expenditure could be as high as $3.2 billion this year, versus last year’s $1.8 billion.

This is good news for companies that supply chips, networking gear and software used in data centers and related services. Juniper Networks,Arista Networks and Finisar are likely beneficiaries, according to Alex Henderson at Needham. Juniper, in fact, beat expectations with its results on Thursday and gave an upbeat outlook, citing cloud-related demand as a factor. Arista reports results on May 14.

Hortonworks, which makes data-management software that Microsoft sells to its own cloud clients, is also set to benefit from the trend, according to brokerage Pacific Crest. Microsoft accounted for more than 20% of Hortonworks’ revenue last year.

More notable is the fact that Amazon, Google and Microsoft aren’t being punished by investors for this largess. Far from it.

Amazon’s share price soared 14% on Friday, adding more than $25 billion to its market cap, primarily on the fact that the company is now disclosing operating details of its AWS cloud-services unit.

Microsoft, which said that its commercial cloud business is now generating annual revenue of about $6.3 billion, saw its shares gain more than 10% on the same day. That is despite the company reporting a drop in earnings for the March quarter. Google, meanwhile reported a 25% jump, year over year, in capital expenditure and its stock rose nearly 3%—despite its high spending being of particular concern to investors over the past year.

The cloud-computing market will more than double by 2018 to $127 billion, IDC estimates. That is why companies such as Amazon, Google and Microsoft are sparing no expense to stay in the game. They can’t afford not to.