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Investors cool on cloud but CEOs double down
- Earnings reports from the big three cloud players disappointed investors this week. As is often the case, when a new wave hits, it tends to be overhyped at the beginning of the cycle and underestimated at the eventual steady state. The infrastructure-as-a-service and platform-as-a-service revenue alone for the Big Three approached $200 billion in 2024 and grew 25%. All three cited capacity constraints and, along with Meta Platforms Inc., are committing more than $300 billion in capital spending this year, most of it to support current and future AI demand.
- Despite investor expectations, the hyperscalers Microsoft, Alphabet and Amazon all experienced triple-digit AI growth and cited capacity constraints. The capex required to pursue long-term AI benefits created an environment in which the hyperscalers were doubling down investments at a time when more traditional investors wanted faster returns. The current environment is marked by short-term skepticism toward cloud investments, yet executive teams are doubling down on AI-driven strategies with the expectation of massive future returns.
- The Big Three cloud players and Alibaba accounted for $210 billion in revenue in 2025; a 24% growth on a $200 billion market. With Azure and GCP growing in the mid-30s, as you may recall in 2023, we adjusted our Azure figures to strip out some of the non-cloud revenue. In this context, investors will likely begin evaluating long-term opportunity instead of the short-term growth challenges and uncertainties.
- The hyperscaler cloud market is likely to expand to above $425 billion by the end of this decade, with AWS maintaining 50% of the market but expected to drop below 50% this year. In January 2023, Microsoft’s Azure AI was ahead of Google, with 175N to Google’s 127 (with Google as a percentage of AWS at the time of 72%). AWS operates at $115 billion annual rate, yet is capacity-constrained by chips and certain other components.
- The data indicates that Google is rapidly closing the AI gap with AWS when measured in account penetration and seems to underscore Google's strong technology platform. Despite the current skepticism toward cloud spending, the imperative to capture unprecedented AI opportunities drives continued high levels of investment. Firms that successfully manage near-term cost concerns while positioning for AI dominance stand to reap substantial rewards, validating the cloud’s indispensable role in the AI revolution.
- Overall, the potential payoffs and efficiency gains offered by AI are compelling, which encourages CEO's to double down on investments amid short-term financial pressures. As cloud services mature, the next wave of AI capabilities can emerge, which might become the leading differentiator in the market giving firms a contemporary edge.
- The data illustrates that, unlike typical market scenarios where a single leader dominates revenue, three major hyperscalers can simultaneously generate strong returns, supported by the market's vast size. Multiple major vendors, including AWS, Microsoft Azure, and Google, can thrive thanks to the sector's scale, with additional players such as Oracle, IBM, Snowflake, and Databricks carving out niches.
- Google cites its strong tech stack as giving it a competitive edge. The cloud ecosystem accommodates specialized firms such as Snowflake and Databricks, which build on top of the cloud, which further reinforces the ecosystem's flexibility and breadth.
- Firms that invest prudently in both cloud and AI today are positioned to realize outsized gains in the future. The cloud market's size means three companies can dominate and make a lot of money, and, as the emerging consensus suggests, DeepSeek-like cost reductions in AI tooling are likely to accelerate adoption building on the cloud foundation.
- The need to capture unprecedented AI opportunities drives continued high levels of investment in the cloud market, and firms successfully positioning for AI dominance stand to reap substantial rewards. Despite the current skepticism toward cloud spend and the short-term earnings sentiment, sumptuous potential and upside opportunities — particularly in driving operational efficiencies — are too significant for CEOs to overlook, highlighting the cloud's deep-seated position in the AI revolution.
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