Amazon and Microsoft are at the forefront of the cloud computing revolution. Their lofty valuations measured by Price/Earnings, Price/Sales and Price/Book Value ratios reflect mainly the expectations for growth of cloud computing priced in by market participants.
Will Amazon and Microsoft deliver? So far, both Amazon and Microsoft are doing very well. Their cloud computing revenue is growing by more than 20% year on year which makes them internet stars in terms of growth. The current value of the Software As A Service(SAAS) cloud computing market is estimated somewhere at 90 billion USD a year. The SAAS market is expected to reach 250 billion USD in 10 years. If Amazon and Microsoft keep their current market share of 30% and 15% respectively this would give them 80 billion and 40 billion in cloud computing revenue in 10 years. The cloud computing market is characterized by very high growth margins. If both Microsoft and Amazon make let's say 33% net profit margin on cloud computing this would give them net yearly profits of circa 26.7 billion USD and 13.3 billion USD respectively in 10 years. So if we apply a reasonable technology Price/Earnings multiple of 20 this would value Amazon and Microsoft's cloud computing businesses at 526 billion USD and 266 billion USD in 10 years.
Apparently the stock market is extrapolating those future values at today's market capitalizations of both Amazon and Microsoft. Currently the above calculations represent about 55% of Amazon's and 37% of Microsoft's stock market capitalization.
Will both Amazon and Microsoft grow into these valuations. I would say that Microsoft has a higher chance of living up to current market expectations. Microsoft has the Microsoft Office advantage. Microsoft Office is gradually moving to the cloud with Microsoft 365, which provides a complementary cloud computing service which enhances Microsoft's SAAS cloud computing business.
Amazon would have more difficulty living up to the current hype. Competition is growing, so Amazon will have difficulty retaining its current 30% market share of the SAAS cloud computing market. What is more, Amazon's main business of internet shopping is notoriously not very profitable.
But, as things stand, for both Amazon and Microsoft the market seems to be pricing 10 years of brisk future growth now. Much like the market did for Microsoft stock in 1999. For 16 years after 1999 investment in Microsoft's stock almost did not make any money excluding dividends. The market was adjusting to the apparent overpricing of Microsoft.
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Petar
Vladimirov Posledovich is not liable for any investment losses incurred
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Respectfully yours,
Petar Posledovich
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