Here's How The Cloud Is Helping Tech Stocks Win

Earnings season is off to an inconsistent start, with big name brands like Netflix (NASDAQ:NFLX) , Chipotle (NYSE:CMG) , and Starbucks (NASDAQ:SBUX) struggling with revenue numbers and customer growth. On the tech side of things, however, we are witnessing a very clearly trend: cloud-based services are the key to success.

This week, a few tech giants reported earnings. One of the more impressive reports was from Microsoft (NASDAQ:MSFT) , which beat the Zacks Consensus Estimate by 11 cents and topped revenue estimates by about $500 million.

(Also read: Microsoft Beats on Q4 Earnings Behind Impressive Cloud Performance)

The big story from Microsoft was the success of its cloud platforms. Its Intelligent Cloud segment saw revenues grow by 7% year-over-year, while its main cloud product, Azure, saw sales grow by over 100% from last year.

We also saw an earnings beat this week from International Business Machines (NYSE:IBM) . The company announced its second-quarter results, and both non-GAAP earnings per share of $2.95 and revenues of $20.238 billion easily surpassed the respective Zacks Consensus Estimate of $2.89 and $20.082 billion.

(Also read: IBM Corp. Q2 Earnings Beat; Imperatives Gain Steam)

On a year-over-year basis, IBM actually saw declines in both earnings and total revenue. However, the company was boosted by strong performance in its cloud segment. IBM’s “cloud as-a-service” offerings had an annual run rate of $6.7 billion, which was up 50% year-over year, and its overall cloud revenue was up 30%.

SAP SE (TO:SAP) also reported earnings this week. The company reported second-quarter 2016 IFRS earnings of €0.68 (77 cents) per share, growth of 74.4% from €0.39 earned a year ago. Its Cloud and Software business reported second-quarter revenues of €4,359 million ($4,922.2 million), up 7.3% year- over-year. Cloud Subscriptions & Support saw revenues of €720 million ($813.0 million) in the quarter, up 30.4% year-over-year.

By now, most investors are aware of Amazon’s (NASDAQ:AMZN) incredibly popular cloud-based platform, Amazon Web Services. AWS has become a key factor in Amazon’s recent profit-turning, with revenues in the segment growing by 64% in the first quarter.

One of the best stocks in the computer software industry right now is Adobe (NASDAQ:ADBE) , which has seen massive growth in its Creative Cloud, Document Cloud, and Marketing Cloud services. All of Adobe’s Cloud offerings are actually hosted on Amazon Web Services.

In the latest quarter, strong growth in the Creative Cloud and Document Cloud areas drove Digital Media annualized recurring revenue to $3.41 billion, an increase of $285 million from the quarter before. Adobe’s Marketing Cloud posted record revenues of $385 million, an 18% increase year-over-year.

So, why is that tech stocks are being boosted by the cloud? Well, consistent growth in these companies’ cloud segments is helping with margins. One of best aspects of cloud-based offerings is that they often cost less to develop and operate than other business areas.

Also, cloud-based products are in high demand and are making up for sluggishness in other categories. For example, Microsoft has been dealing with global decline in PC demand. As the company has shifted its focus away from traditional PC-based hardware and software, it has seen success again.

The bottom line is this: tech stocks are living by the cloud right now. Until we see a drop-off in demand for these offerings, investors should continue to expect cloud growth to drive gains in share prices.