Cloud computing means renting computing power, storage and software over the internet instead of owning the hardware yourself. When you stream a film, store photos online or use a business app, the work is probably being done in a giant data centre run by a cloud provider. For investors, the cloud has become one of the most important businesses in the world, and it sits at the heart of the boom in artificial intelligence.
Who the big players are
Three companies dominate. Amazon Web Services, part of Amazon, is the largest. Microsoft Azure is second, and Google Cloud, part of Alphabet, is third. Oracle and a number of smaller specialists also compete. Between them, the biggest providers are often called hyperscalers because of the vast scale of their data centre networks.
How the cloud makes money
Cloud providers charge customers for what they use: processing power, storage, databases, networking and increasingly AI tools. Many large companies have moved their computing to the cloud because it is flexible. They can scale up when they need more and scale down when they need less, without buying expensive equipment that might sit idle.
The economics are attractive once the infrastructure is built. A data centre is a huge fixed cost, but each extra customer adds revenue at relatively little extra cost. That is a classic example of operating leverage, and it is why cloud divisions can be very profitable when demand is strong.
Why AI changed the story
Training and running AI models requires enormous computing power, mostly from specialised chips. Companies building AI products rent much of that power from the cloud providers, which has pushed demand sharply higher. In response, Microsoft, Alphabet, Amazon and Meta are spending staggering sums on new data centres, chips and power supplies. Our guide to capital expenditure explains how that spending shows up in company accounts.
That spending is now the market’s biggest question. If AI revenue grows fast enough, today’s investment will look visionary. If it does not, the costs will weigh on profits for years. Last week investors punished Meta for raising its spending plans, a sign of how nervous the market has become.
What to watch in earnings
When the big cloud providers report, investors focus on a few numbers. The first is cloud revenue growth, and whether it is speeding up or slowing down. The second is the size of the order backlog, which shows future contracted revenue. The third is capital spending plans for the coming year. The fourth is profit margins in the cloud division.
Microsoft and Alphabet report after the US close on Wednesday 28 October, with Amazon on Thursday. Their cloud numbers will be read as a verdict on the whole AI trade, which makes this one of the most important weeks of the year for technology shares. Our Morning Market Brief has the details.
The risks
The cloud is competitive, and price wars can squeeze margins. The cost of power and chips is rising. And if companies decide they have overbuilt AI capacity, demand could slow just as huge new data centres come online.
The bottom line
Cloud computing is the rental of computing power over the internet, and it has become the engine room of Big Tech. Understanding how it makes money, and why AI spending matters so much, will help you read the market’s reaction to this week’s results.
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