The latest spate of tech earnings reveals a simple truth -- upside surprise flows from winning the cloud.
That's why Amazon and
Before getting into that, it is worth pointing out that investors should generally avoid individual stocks. That's because it is so difficult to know more about a company than all the highly paid fund managers who are scrambling for an extra information edge so they can beat their rivals.
The game that the market plays I call "beat-and-raise" -- meaning that if a company beats analyst estimates for revenue and earnings and raises its forecast, the shares pop. Otherwise they plunge.
Managers can play tricks to win beat-and-raise by trying to guide investors to expect less. Because if Wall Street bakes much higher revenues and profits into their forecasts, eventually the company is not going to be able to deliver.
And then the stock will plunge and spend a few quarters in purgatory.
In July, I explained why I think Amazon is going to deliver upside surprise and will therefore hit $1,060 in the next few years.
But Microsoft also delivered better than expected results -- even though sales were down and profits were up.
EMC dutifully delivered on dull forecasts.
And the difference all comes down to their relative positions in a big, profitable industry that's growing fast.
The Cloud
Renting access to computers for a monthly fee is big business. Synergy Research Group estimated that the leading industry participants such as Amazon, Microsoft,
John Dinsdale, chief analyst and research director at Synergy Research Group, told Information Week that Amazon is top dog with 29% market share -- Microsoft has 12%; IBM, 7%; and Google, 6%.
But while big companies can jump into the market, winning in the cloud is not for everyone. "Developing the necessary global hyperscale data center infrastructure along with the required marketing and operations support is simply beyond the reach of all but a very small number of players. This is not going to change," said Dinsdale.
While the industry is growing at a 33% rate, the fastest growing player is Microsoft at a 96% annual rate in the first quarter of 2015 -- with Google up 74%; IBM rising 54%; and Amazon up 49%, according to Information Week.
Amazon
On October 22, Amazon reported a profit of $79 million when analysts expected a loss and revenues that were $500 million higher than forecast, according to the New York Times.
The market rewarded Amazon in pre-market trading with $27 billion in additional market capitalization -- a 10% pop to $620 -- boosting its total value to $264 billion.
The surprise came from the cloud. In the third quarter, Amazon Web Service enjoyed a more than five-fold increase in operating income to $521 million. And AWS's operating margin popped from 8% to 25%.
Microsoft
The same day, Microsoft reported a 12% drop in revenue to $20.38 billion and a 2% increase in net income to $4.62 billion.
But analysts adjusted for a revenue accounting change and concluded that Microsoft earned EPS of 67 cents a share -- 8 cents better than investors expected, according to Thomson Reuters.
Microsoft shares popped nearly 10% in pre-market trading -- 8% growth in its cloud revenue to $5.9 billion is making investors happy.
EMC
EMC -- which agreed to merge with Dell -- reported sales and earnings that "met analysts’ relatively low expectations amid slowing demand for its storage devices," according to Bloomberg.
Companies are buying less spinning disk thanks to the rise of the cloud -- and EMC shares are flat in pre-market.
Will the cloud stop being a source of upside surprise? Some day it will -- but perhaps not before Amazon shares hit $1,060.
