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Microsoft share price nears new high as cloud services domination spurs rally

In the cloud wars, Microsoft’s [MSFT] cloud computing arm Azure, which offers more than 100 integrated services from analytics and computing to networking and storage, is winning big contracts over its competitors with companies highlighting its track record in providing reliable software as its biggest advantage.

The shift has seen leading cloud provider Amazon Web Services (AWS) [AMZN] lose out to Azure as retailers such as Walmart [WMT], Kroger [KR], Gap [GPS] and Target [TGT] opt for a company that doesn’t conflict with their own market.    

Although the company doesn’t disclose exact revenue figures for its business streams, Statista estimates that Azure made around $13.5bn in 2018, capturing nearly 17% of the $80.4bn-a-year cloud market. AWS meanwhile brought in $25.4bn in revenue in 2018.Microsoft 1-year share price performance, CMC Markets, as at 2 April 2019

 

The competition to supply the foundation layer of computing and software – the cloud computing equivalent of an operating system – is heated, and costly, with the biggest players spending up to $10bn a year on global networks for data centres. 

 

Microsoft beefs up cloud tools  

To stay ahead of the market, Microsoft has been working with emerging technologies including artificial intelligence and augmented and virtual reality to expand its offering, and has even replaced its tired Explorer browser with the slicker Windows Edge. 

The browser has been built on Chromium, the same engine as Google’s [GOOGL] Chrome browser. An updated version is expected to be released later this year, as part of a slew of upcoming product launches. 

The release of the new browser is set to boost Azure’s offerings further, which – as a whole – increased by 76% in revenue in the second quarter of 2019, lifting Microsoft’s revenue from its services by 24%.

 

Market cap$913.15bn
PE ratio (TTM)27.61
EPS (TTM)4.31
Return on equity (TTM)39.35%

Microsoft stock vitals, Yahoo finance, as at 2 April 2019

 

Analysts at Morgan Stanley estimate that Azure accounted for 10% of Microsoft’s $32.5bn in overall revenue in the latest quarter. While Griffin Securities analyst Jay Vleeschhouwer predicts revenue to reach $16bn in 2019, with Azure representing 12.6% of total sales.

Analysts at Wedbush Securities meanwhile are bullish on the stock and believe that its cloud services could boost the company’s market cap past the $1tn mark for the first time. Microsoft’s shares would need to rally more than 10% for this to be achieved.

As it stands, the tech giant’s breakout stock performance so far this year is broadly in line with the Nasdaq’s 15.8% gains, with the shares hitting a new all-time-high of $120.22 on 21 March. However, compared to the software industry, the share price’s 25.5% annual returns are below the industry average of 30.3%.  

 

Targeting the automotive industry  

The next industry snapping up Azure’s services is the automotive industry, which has seen incumbents such as Aston Martin [AML], Honda [7260], Mazda [7261] and the Renault [RNO], Nissan [7201] alliance use its services already. 

“At some point, perhaps the car cockpit could be a new battleground,” Vleeschhouwer said, who has a ‘buy’ rating on the stock. He envisions voice assistants in driverless cars which can drive the owner home on command.

For executive vice president of Microsoft’s cloud and AI divisions, Scott Guthrie, the company’s strategy forms part of a bigger picture: packaging up its technology and providing business customers an easy to use solution.  

“We’ve focused a lot on how we provide kind of a comprehensive cloud that we think really appeals to all those different audiences in unique ways,” Guthrie told Business Insider.

“We’ve focused a lot on how we provide kind of a comprehensive cloud that we think really appeals to all those different audiences in unique ways” - Executive vice president of Microsoft’s cloud & AI divisions, Scott Guthrie

 

The cloud gaming revolution  

While Microsoft’s transition to cloud services hasn’t come as naturally as its industry peers, its gaming business has been evolving steadily since it first acquired games developer Bungie in 1999. 

Bill Gates unveiled the first Xbox in 2000 at the Games Developer Conference and while the product has gone through plenty of improvements and iterations, fast forward to June 2019 at the Electronic Entertainment Expo and Xbox gaming chief Phil Spencer is set to unveil the next big step in gaming, the Project XCloud. 

Powered by Azure, Project XCloud is made possible through a number of acquisitions over the last year and will allow users to play any game on any device. Spencer believes that the company’s gaming division, which made up 9.4% of the company’s total revenue in 2018 at $10bn, will form the backbone for growth in its cloud services.

9.4%

Percentage of total revenue made up by Microsoft's gaming division

Cloud gaming is big business and with Google’s Stadia and Alphabet’s Project Stream recently being announced, Microsoft is gearing up for its own launch. The tech giant has so far released details about its Game Stack, a new offering that bundles together various offerings – including Azure, Xbox Live, App Centre, PlayFab and others – into an all-in-one game development package.  

Microsoft’s Azure is far-reaching; it’s in 54 regions, with 135 sites and 161,000km of fibre, giving it a clear edge to bring a revolutionary gaming experience to players around the world, while growing profits in the process.

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