By Therese Poletti, MarketWatch
Microsoft and Amazon are challenging Apple for top spot, and Google isn't far behind
After nearly a decade of Apple Inc. dominance, there is an evolving four-way race among the top tech giants that is pitting the cash cow against a trio of cloud-computing colossuses.
On Friday, Microsoft Corp. (MSFT)(MSFT)(MSFT) ( ) e ( the week as the most valuable company ( ), surpassing Apple (AAPL) for a title the iPhone maker has held for most of the past seven years. On Monday, Amazon.com Inc. (AMZN) briefly became the most valuable U.S. public company ( ), before falling back. After Tuesday trading, Apple was back on top, about $5 billion ahead of Microsoft and $23 billion ahead of Amazon. Behind those three, but not forgotten, is Google parent company Alphabet Inc. (GOOGL) (GOOGL), which was the company pushing for Apple's throne less than two years ago ( ).
Apple became the world's most valuable company in 2011 by surpassing Exxon Mobil Corp. (XOM) , fueled by its hefty cash-generating business, high profit margins and strong iPhone sales growth. In August, Apple even became the first company with a $1 trillion market cap. ()
But Apple lost that trillion-dollar valuation in a giant tech selloff that was partly of its own making (), as investors worried about the slowing growth rate of the iPhone. That has allowed three tech companies with lesser financial results but potential monster cloud-computing businesses to creep up on Apple.
Microsoft, Amazon and Google can't hope to compete with Apple on profit. Apple reported a whopping $59.5 billion in net income for its most recent fiscal year, which was complete at the end of September. That total surpasses the combined profits of Amazon, Alphabet and Microsoft in their most recently completed fiscal years.
From 2016: Tech is king of Wall Street, thanks to the cloud ()
Investors betting on Apple's competitors for the top spot are not looking at results, however, as much as growth rates and tech trends. Namely, the growth of cloud computing, which is dominated by the other three companies at the top of the valuation list.
The two companies closest to Apple's spot are reporting huge growth in their cloud-computing businesses, where they offer cloud services for a huge range of customers, large and small. Staid old Microsoft, which has never been an official part of the much-vaunted FAANG grouping of tech stocks, surged into a zone of its own this year, propelled by hefty growth in the cloud ().
See also: Amazon was almost worth $1 trillion, now it is worth less than Microsoft ()
Amazon's jump Monday came after the conclusion of its annual conference focusing on the Amazon Web Services cloud-computing business, AWS re:Invent, a five-day event that highlighted new products (), including a big focus on machine learning and artificial intelligence in the data center. Amazon announced its own custom designed chip, rolled out a slew of products focused around AI and an Amazon hybrid-cloud service.
"Amazon's rapid pace of innovation is on full display at re:Invent," Robert W. Baird analyst Colin Sebastian reported from the show.
Read more: The engine that powers Amazon earnings has nothing to do with e-commerce ()
AWS played a major role in the development of what we think of today as corporate cloud computing, when it launched its utility-like service in 2006. At Microsoft, from the day in 2014 that Satya Nadella took over from Steve Ballmer as chief executive, the company has been completely focused on catching Amazon.
From his first email to employees to his first conference call with Wall Street (), Nadella was laser-focused on building out Microsoft's then-growing Azure cloud-computing product, calling the cloud a "gold rush" for the tech giant. He proved to be correct. When Nadella took the helm in February 2014, Microsoft's shares were trading around $37. On Friday, shares closed at $110.89, a threefold increase ( ).
More from Therese: Microsoft's earnings show Nadella is blazing the right path ()
(transformation included moving packaged software for PCs and servers to cloud-based services while investing big in Azure, which went live in 2010 and now offers more than 600 services as the biggest competitor to AWS. Microsoft also has de-emphasized products where it was not winning, such as in mobile phones, while zeroing in on hybrid cloud, a mix of public and private cloud for companies that cannot completely commit to moving all their data off-site.
"We believe Nadella & Co. are in the catbird's seat to get more of these complex workloads (e.g., AI, machine learning, etc.) as more enterprises take the leap to a hybrid cloud architecture over the coming years," said Dan Ives, an analyst at Wedbush Securities. "While AWS remains the leader in cloud, we believe Microsoft is starting to close the gap."
In contrast, Alphabet's Google has had a slower go in the cloud, and recently replaced its top cloud exec (), but it has still managed to get to No. 3 behind AWS and Azure. In February, company executives said the Google Cloud unit was generating about $1 billion a quarter in revenue ( ), about one-fifth the size of AWS and a tiny portion of its total 2017 revenue of $110.9 billion, which is driven mostly by its advertising business.
Cloud computing, with its jargon and corporate focus, may not seem as exciting as Apple's newest and greatest iPhones, but it has greater growth potential. Smartphones are hitting a saturation point, both in technology developments and demand, with unit growth slowing for the past two years. Apple has been advising investors to pay more attention to its faster-growing services business, including its own much smaller cloud business, but Wall Street has a hard time ignoring the larger cloud numbers being shown off by Apple's rivals.
The race will ultimately come down to whether more investors prefer the security of steady and solid cash and earnings thrown off by Apple, or the potential for greater growth in the cloud. Many will wager on both, a known known and an unknown known, but whichever company ends up as the most valuable will be an indicator of where tech is headed.
-Therese Poletti; 415-439-6400; AskNewswires@dowjones.com
(END) Dow Jones Newswires
December 04, 2018 17:50 ET (22:50 GMT)
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