Move over Amazon.com Inc., Microsoft Corp. is coming for your throne in the sky.
beat fourth-quarter earnings expectations Thursday, helped by a $1.8 billion tax credit it received for its Windows Phone business. But it’s the company’s commercial cloud business, which has been growing even as the phone business is fading, that has analysts excited about the potential to overtake Amazon
in the lucrative sector.
Azure, Microsoft’s cloud-computing offering that contends with Amazon Web Services, increased its bookings by 30% year-over-year, while its revenue increased 97%. While spending could pressure margins and push proceeds farther into the future, at least one analyst believes Azure will “dethrone” AWS.
Microsoft shares closed at an all-time high of $74.22 Thursday and gained after earnings were announced, but the gains did not hold and shares closed down 0.5% Friday. Shares of Microsoft have gained 11% in the past three months, outperforming the S&P 500
, which has gained 5%, and the average analyst rating on Microsoft is buy with a price target of $171.08, according to FactSet.
Here’s what analysts said:
- Microsoft’s commercial cloud business revenue soared 56% year-over-year, hitting an $18.9 billion annualized run-rate. The level of growth “all but ensures” that Microsoft can “dethrone” AWS to be the leader in the cloud, say KeyBanc analysts.
Microsoft has turned its focus to its Azure cloud business, as it has been reorganizing its sales team to focus more on that area. Overall, Microsoft’s cloud business has grown to make up close to 20% of the company’s total revenue, compared with 5% three years ago, the analysts said.
The analysts have a bull case in which Microsoft’s cloud business climbs about $50 billion in revenue by 2021.
KeyBanc analysts raised their price target to $82 from $78 and reiterated an overweight rating.
- With the growth in the cloud, MKM analysts expect improving margins in Microsoft’s cloud segments, with an improvement of 1,000 basis points year-over-year this quarter.
Non-cloud margins also improved at an estimated growth of 50 basis points year-over-year, thanks to growth in the sales of PCs and servers. But MKM does not see those margins continuing to improve as investments increase.
Microsoft Chief Financial Officer Amy Hood said Thursday that executives expect to increase their capital investment to meet the growth in the cloud and make more investments in LinkedIn, among other initiatives. The company gave guidance of commercial revenue between $24.85 billion and $25.05 billion, which MKM said was lower than consensus, and guided down 2018 margins.
This implies that the gains from Microsoft’s cloud business will not be realized in earnings until further down the line than analysts expected, wrote Kevin Buttigieg, lead analyst on the report.
“This could temper shares near term, particularly given speculation that the recent restructuring could drive additional margin expansion in FY18,” Buttigieg wrote.
The analysts raised their price target to $70 from $66 and reiterated a neutral rating.
Don’t miss: The massive changes happening at Microsoft
- Though commercial cloud margins could waver quarter-to-quarter due to seasonality, Stifel analysts see the margins in the cloud space growing overall as customers choose higher-priced services and as Azure and cloud-software offerings like Office 365 and Dynamics continue to grow.
“This is key in our view, as gross profit growth coupled with moderate operating expense increases should lead to continued operating profit and free cash flow growth, a key tenet of our positive thesis,” wrote Brad Reback, lead analyst at Stifel.
The analysts raised their price target to $80 from $73 and reiterated a buy rating.
- Raymond James analysts raised their price target to $84 from $77 and reiterated a strong buy rating.
In addition to the strength in cloud, the analysts point to 4% growth in server sales and 1% growth in Windows equipment, even as the overall PC market was falling 4% in the quarter. While they also see margin pressure coming in fiscal 2018, they expect margins to expand again starting in fiscal year 2019.