With the biggest tech companies lining up to report earnings this week, many were expecting a confirmation that the Covid-19 pandemic had cemented the cloud as the world’s most profitable industry. But after German software giant SAP reported disappointing earnings Sunday night that drove down its stock price, some observers were feeling jitters.
“On Monday we said, ‘Hey, you said [the third quarter] was going to be really good,’” says Thomas Broderick, an analyst at investment bank Stifel.
Those doubts proved short-lived. Government hearings and a bearish overall stock market didn’t slow down the tech giants, most of which ended up reporting earnings that exceeded analyst expectations. The big number: $2 billion. That’s the approximate combined revenue that Amazon, Microsoft and Alphabet, which all reported earnings Thursday, collectively added in cloud services for the last quarter alone, according to Stifel’s research.
Amazon said its cloud business Amazon Web Services generated $11.6 billion in the third quarter, a 29% increase from the same period in 2019. Alphabet reported that its Google Cloud Platform revenue rose 45% to $3.4 billion. And Microsoft attributed its 12% year-over-year overall revenue jump to its booming Azure cloud business. Other cloud companies such as Twilio and ServiceNow also wowed shareholders.
Such blockbuster results can be largely attributed to the effect the Covid-19 pandemic has had on tech companies, boosting demand for their cloud products that have allowed workforces to connect while employees work from home. “Before, digital transformation was a choice,” says Alex Zukin, an analyst with RBC. “Now for a lot of industries, it’s no longer a choice, it’s an imperative.”
The pandemic-driven boom has helped other public cloud stocks as well. Twilio, the $41 billion cloud communications provider, started the week’s earnings for the U.S.-based tech companies with $448 million in revenue for the quarter, close to $50 million above analyst expectations. And cloud services provider ServiceNow followed that up on Wednesday with a 2% stock jump after generating $1.15 billion for the quarter, above forecasts.
Under CEO Bill McDermott, who joined in October 2019, ServiceNow’s share price has almost doubled; the company is now valued at $94 billion. His success at the company may serve as a bitter pill for SAP, which has faced pressure from activist investor Elliot Management to scale back growth in recent months, and from which McDermott departed as CEO last year. On Sunday evening, the German tech giant reported that coronavirus lockdowns had affected demand for its business and customer management software. The results, SAP’s worst in more than a decade, drove down its stock 20% and its market cap to 118 billion euros.
But as it turns out, SAP was the exception, not the rule. For most companies, it’s good to be in the cloud. “The theme of this week is “adapt or die,” says Broderick, the Stifel analyst.