Since Amazon (AMZN) started disclosing the results of its cloud service business back in April, the stock is up 68%, representing a $124 billion increase in stock market value. It seems Wall Street had previously failed to appreciate just how quickly big corporations were shutting down data centers and server farms in the move to outsourced cloud services.
Now some analysts and investors are starting to consider the flip side -- what's surprisingly good news for Amazon and a few other cloud providers like Microsoft (MSFT) and Alphabet's (GOOGL) Google is probably the precursor to surprisingly bad news for traditional IT giants like IBM (IBM), Hewlett Packard Enterprise (HPQ) and others. And they say that they're starting to cut back on stocks and bonds of the lagging players, fearing an accelerating downward cycle.
"Some of this is already priced in, but what's not priced in is how quickly all this is happening," Rahim Shad, tech analyst at fund manager Invesco, says. "The pace is going to surprise the HP's, the Dell's, the EMC's."
"It's been going on for a while but it's definitely been accelerating for the past year," says Matt Sabel, manager of the MFS Technology Fund (MTCAX). Noting the rapid growth of the winning cloud companies, "it's all coming at the expense of the traditional IT companies out there," Sabel adds.
Sabel's fund held Google, Facebook (FB) and Amazon as its top three positions, accounting for 22% of its assets as of the end of September. He increased all three positions slightly over the prior three months, according to the fund's disclosure statements. The fund held no shares of IBM, while EMC (EMC) and HP comprised about 4% of the fund.
The trend was further hammered home last week when the chief technology and information officers of some of the largest U.S. corporations signaled their strategies to accelerate moving operations into the cloud.
"Our data centers have always had lots of servers, lots of cost, using a lot of energy, and this is not going to get us to the future," Alan Boehme, Coca-Cola's (KO) CTO, said at the Web Summit in Dublin. "We have a goal within the next three to five years to have about 75 to 80% of Coke's computing environment in the cloud."
Boehme wasn't shy about identifying which old-line firms were losing his company's business, either. "We would always rely on Big Blue, HP, Dell, the major corporations, and they could provide us with that vision for the future," he said. "We were getting this from the analysts -- the Gartners, Forresters and others. Again we can't do that anymore -- the world is changing too quickly."
General Electric (GE) CIO Jim Fowler, speaking at Oracle World in San Francisco last month, said the industrial giant could slash the cost of running an important oil and gas application over 90% by shifting to the cloud, for example. Application updates that once took 20 days can now be implemented in two minutes, he said.
So far, about one in five applications at GE runs in the cloud, but "by 2020, I'll be at 70% of my load [will be] running in the cloud," he said.
Trying to play catch-up
Such comments resonate with money managers trying to sort through the winners and losers of the new cloud era of computing. Comments by the Coke and GE execs "really validate the technology and the approach," says Todd Peters, senior analyst at money manager American Century. "We're still in the first or second inning of the adoption."
Amazon's web services unit has already reported revenue of $5.4 billion for the first three quarters of the year, an increase of 70% over the same period a year ago. Sales should exceed $10 billion next year and $16 billion in 2017, analysts at Deutsche Bank projected in a recent report. And each dollar of sales by Amazon represents a much larger amount of customer savings on traditional hardware and software, as GE's CIO noted last week. Google and Microsoft don't disclose their directly comparable sales; analysts estimate they are growing about as quickly but on a much smaller scale.
The truly lagging companies are trying to get on the bandwagon and there's plenty of braggadocio coming from top executives. Investors, however, are increasingly worried that cloud businesses at the old companies won't be able to catch up quickly enough to offset shrinkage in the traditional areas like hardware, maintenance and consulting.
"It's hard to develop a new technology that's going to cannibalize your major business," says MFS's Sabel. "And it's hard to move an iceberg. Some of these companies are just trying to do too much."
IBM CEO Ginni Rometty says the company's buzzword-worthy businesses like cloud, big data and cybersecurity will reach $40 billion of revenue by 2018 from $25 billion this year. Michael Dell has recently crowed that his company's efforts to grow and become a "solutions powerhouse" will help cure cancer and end world hunger. HPE CEO Meg Whitman just split the company to move faster towards cloud solutions.
But at the same time, IBM just reported its 14th consecutive quarter of shrinking revenue, prompting my column arguing that it might be time to change the company's nickname from "Big Blue" to "Medium Blue." Dell's effort to tack on challenged storage provider EMC has done little to generate excitement about his turnaround efforts. And Whitman's firm recently announced it was shuttering its weak public cloud offering known as Helion.
And that's got investors fearful that the pace of bad news is only going to increase.
"I don't think they can do it," says American Century's Peters. "They were all born and bred in the 1990s when the ecosystem was servers and networking gear."