Amazon Web Services’ Moat Has Become Nearly Unassailable

It doesn’t take long when researching tech stocks to hear about the cloud. While it has become a bit of a buzzword, cloud computing is truly making a difference in how technology functions. Instead of having to run software, process data, or store information through expensive, on-site data centers, companies can outsource to some of the most powerful computer banks in the world through the cloud.

While this solution isn’t for every business, it covers a vast majority of use cases and translates to a $180 billion market as of 2021’s fourth quarter. Grand View Research expects the cloud computing market to grow at a rapid 15.7% annual pace from 2022 to 2030. This would increase the current market 272% to $669 billion by 2030.

Image source: Getty Images.

With this massive market opportunity, investors should be searching for stocks with sizable exposure to cloud infrastructure. As of the fourth quarter, Amazon‘s (NASDAQ: AMZN) Amazon Web Services (AWS) led this market over second-place Microsoft Azure.

Chart showing Amazon leading the cloud market.

Image source: Statista.

While a 12% lead doesn’t seem like much, it really is massive. During the period ending Dec. 31, 2021 (Amazon’s Q4 and Microsoft’s Q2), AWS and Azure’s quarterly sales grew by 40% and 46%, respectively, year over year. If both growth rates were maintained throughout the future, it would take Microsoft more than 10 years to pass AWS in total sales.

The lead is even more impressive when compared to third-place Alphabet‘s Google Cloud. With it growing at a 45% pace in 2021, it would take 34 years to catch AWS at the current rate. AWS had the first-mover advantage, and it used this early lead to clearly set itself apart from its competitors.

AWS isn’t asleep at the wheel

Even though AWS has built an incredible moat, it is still innovating. At its annual re:Invent conference, more than 26,000 people attended in person and “hundreds of thousands” attended virtually, according to CFO Brian Olsavsky. At the event, more than 115 services and features were introduced, and partnerships with several major players were highlighted. Names like Goldman Sachs, Rivian Automotive, and Meta Platforms were among those named using AWS to transform their businesses.

Computer screen with a car model on it.

Image source: Getty Images.

Even though AWS is the clear leader, the cloud computing market is wide enough to support multiple competitors. As a result, investors can dig into multiple companies when determining how they want to be exposed to cloud infrastructure.

What’s the best cloud computing stock?

While AWS is winning the cloud computing race, its core e-commerce business didn’t have a phenomenal 2021, with sales only growing 9% YOY in North America and falling 1% YOY internationally. Because AWS only makes up 13% of Amazon’s total revenue, Amazon isn’t my top cloud computing pick.

Even though Microsoft is in second place, its Q2 intelligent cloud revenue made up 35% of its total business. It is also growing faster than AWS, although it will likely never close the gap.

I also like Alphabet, which saw 80% growth in deal volume and launched more than 2,000 cloud products and features in 2021. Alphabet noted it added nearly 6,500 employees during Q4, most of them working for Google Cloud. Alphabet may be behind, but it is spending heavily to catch up. With Alphabet, investors also get a successful advertising business as well as YouTube.

There are also pure plays like Cloudflare and DigitalOcean, which focus on different segments within the cloud market. With an industry expected to rapidly grow over the next decade, investors would be smart to have some exposure to cloud stocks.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Keithen Drury owns Alphabet (C shares) and Cloudflare, Inc. The Motley Fool owns and recommends Alphabet (A shares), Amazon, Cloudflare, Inc., DigitalOcean Holdings, Inc., Goldman Sachs, Meta Platforms, Inc., Microsoft, Salesforce.com, and Tencent Holdings. The Motley Fool recommends Alphabet (C shares). The Motley Fool has a disclosure policy.

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