Two Hot Cloud Services Companies Burn Wall Street Investors

How's this for ironic: Amazon and IBM are two of the hottest providers of cloud services. But both companies are burning investors on Wall Street following weak earnings reports. Shocking? Hardly. Take a closer look at the business realities at Amazon and IBM, and you'll see that cloud computing is not a silver bullet solution to earnings weakness. Here's why.

First, the big picture. According to this week's earnings reports:

  • Amazon is growing, but not as fast as investors would like. And CEO Jeff Bezos remains on a spending spree (er, business expansion strategy) that has triggered millions in losses. Following yesterday's earnings results, shares are down about 10 percent today.
  • IBM is not growing. In fact, the company's IT services business (so hot in the 1990s) and hardware business are dragging the company a bit. IBM's Q3 2014 results marked the eighth consecutive quarter revenues have dropped. CEO Ginni Rometty this week -- after months of rumors -- finally confirmed that IBM would not meet its 2015 earnings per share goals. Ouch.

Is Good News Good Enough?

It all sounds pretty dismal. But take a look at each company's cloud businesses:

  • IBM's cloud services revenues are now at a $3.1 billion annual revenue run rate. Pretty awesome for the cloud market. After years of poor cloud performance, IBM jumpstarted its efforts with the SoftLayer buyout last year. Still, that $3.1 billion run rate is a relatively small figure compared to IBM's overall annual revenues of $90-billion-plus.
  • Usage of Amazon Web Services grew about 90 percent in Q3, according to a Q&A statement from CFO Tom Szkutak on yesterday's earnings call. Amazon is a cloud giant, so 90 percent growth atop a big cloud base is impressive. But it doesn't give you all the  data points we need. Usage is another term for workloads or consumption. What we really need to know are AWS revenues and/or income/margins. Amazon won't provide those details.

Either way, cloud services are a small -- but fast-growing -- part of the revenue mixes at Amazon and IBM. And near term, the cloud revenues aren't big enough to offset Amazon's expansion spending and IBM's hardware weakness. 

But don't weep for the giants too long. At some point, weakness becomes a buying opportunity. Like thousands of other investors, I just wish I knew when that specific point in time arrives.