After Microsoft’s most recent quarterly earnings report this Thursday the company’s share price actually closed down 45c after a full day of trading on Friday.
Despite this, however, for many analysts, the earnings was a major signal that Microsoft was turning into an unstoppable juggernaut in the area of cloud computing, with Amazon squarely stuck in their path, like a bunny in oncoming headlights.
Business Insider notes that Microsoft was very close to delivering on Satya Nadella’s 2015 promise of having a $20 billion annual run rate for cloud revenue by 2018, hitting $18.9 billion in the most recent quarter, and putting Microsoft on course for hitting the target sooner than expected.
In its first quarter report, Amazon’s AWS revenues grew a much-slower 43% year-over-year to $3.6 billion, reports The Street.
KeyBanc analysts felt this level of growth “all but ensures” that Microsoft can “dethrone” AWS to be the leader in the cloud, and may hit $50 billion in revenue by 2021.
This bull case caused KeyBanc analysts to raise their price target to $82 from $78.
Pacific Crest Securities analyst Brent Bracelin also estimates that Microsoft’s Commercial Cloud division could soon surpass Amazon Web Services, saying that the “sheer size and accelerating pace” of cloud growth makes it seem likely that its Commercial Cloud group can scale to north of a $50 billion annual run rate by 2021.
Patrick Moorhead, president of market research firm Moor Insights & Strategy, felt Microsoft could likely overtake Amazon’s AWS cloud revenue, but more likely 18 months to two years from now.
“The key is that AWS got this big lead,” Moorhead explained. “It took a while for the public cloud folks to get there and Azure really jumped on it. Microsoft really knows how to speak enterprise, where I would say AWS is learning how to speak enterprise, but speaks startup and developer really well.”
Moorhead felt Microsoft’s hybrid cloud via Azure Stack could be the killer app which gives Microsoft the edge over AWS.
“I expect Azure to narrow AWS’s lead in the public cloud, but Azure Stack will be its secret weapon,” Moorhead noted.
Wells Fargo’s Philip Winslow lauded Microsoft for strong execution, with 97% revenue growth in Azure, and the 12th consecutive quarter of triple-digit revenue growth in Azure premium services. Gross profit beat analyst expectations and suggested to Winslow that this was just the start of the earnings opportunities opened up by Azure and Office 365. He rated the shares as Outperform with a price target boosted from $81.25 to $82.50.
Credit Suisse’s Michael Nemeroff similarly maintained an Outperform rating with a $84 price target, saying the earnings report re-affirmed the bullish case for owning Microsoft’s stock as it foreshadowed the true “earnings power potential” over the next few years, tied to significant growth opportunity in the cloud along with higher cloud gross margins over time.
Barclays’ Raimo Lenschow also saw strong momentum, raising Microsoft’s price target raised from $77 to $82 after the company beat every P&L metric in its report and the Microsoft management’s spending plans suggesting “increased confidence” in revenue and margin growth.
BMO Capital Markets’ Keith Bachman called the quarter “very good” and boosted their price target from $75 to $86 while Bernstein’s Mark Moerdler expressed confidence in Microsoft’s cloud investment strategy and maintained an Outperform rating on Microsoft’s stock with a price target boosted from $81 to $87.
UBS’s Fatima Boolani maintains a Buy rating on Microsoft’s stock with a price target boosted from $73 to $82 while hold out Citi’s Walter Pritchard maintained a Neutral rating on Microsoft’s stock.
Microsoft also delivered 4% growth in server sales and 1% growth in Windows equipment, even as the overall PC market was falling 4% in the quarter.
Cloud services were however 20% of revenue this quarter, up from around 5% 3 years ago, and with the enterprise computing market worth an estimated $3 trillion, it is clear to see why Microsoft is looking up at the minute.
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