Former Microsoft (MSFT) CEO Steve Ballmer isn’t wrong — the software giant’s refusal to report clear quarterly results for all of its divisions (and it cloud division in particular) is, as Ballmer bluntly said it, “bulls***.”
On the flipside, just because Microsoft isn’t detailing its cloud computing results in detail doesn’t mean Microsoft stock isn’t worth owning. In fact, according to FBR & Co., its cloud business may be a key reason to own MSFT for the foreseeable future.
That’s not an ides every investor will easily digest … least of all fans and owners of Amazon.com (AMZN), which is quickly wading into deeper cloud waters itself, and thrilling shareholders as a result.
When one takes a step back and really looks at the new undertows at work in the technology sector, though, Microsoft’s cloud efforts are quite compelling.
Fuzzy Details from MSFT Stock
The fact that Microsoft doesn’t disclose its cloud revenue for each particular product — nor does it disclose specific profit margins for any of its products or services — hasn’t been unnoticed by shareholders. The list of investors who would like to see those detail includes former chief and biggest MSFT shareholder Steve Ballmer, who made it clear at this week’s annual shareholders meeting that “It’s sort of a key metric — if they talk about it as key to the company, they should report it … They should report the revenue, not the run rate.”
Point well taken, particularly given how important the cloud is to Microsoft’s future. It’s also a decision made even more frustrating by the likes of Hewlett Packard Enterprise (HPE) and HP (HPQ), which have been (and presumably will continue) reporting revenue and operating profits in almost annoyingly high detail.
Instead, Microsoft has opted to share what it’s calling a “run rate,” or revenue projection for its divisions based on their current trajectory. The commercial cloud annual run rate, for instance, was in excess of $8.2 billion as of the end of the recently completed quarter (though that number doesn’t actually include “all things cloud” from Microsoft). The projected run rates still don’t clarify how profitable these business lines are, though.
It matters, as Ballmer explains, in that software margins can be quite wide, while cloud service margins can be relatively weaker than software profits.
And yet, it may not really matter for the time being.
But Based on What We Do Know …
Giving credit where it’s due, FBR Capital Markets may have the best finger on the pulse of what’s truly happening cloud-wise right now, and where owners of Microsoft stock are in that regard. FBR analyst Daniel Ives explains:
“… the lone bright star in this cloudy large-cap enterprise tech space has been Microsoft, which is gaining momentum into 2016, as Nadella has made some tough decisions (“ripping the Band-Aid” off Nokia, cost-cutting, free Windows 10 download strategy) to put Redmond on the yellow brick road to the cloud … Cloud is the bedrock for Nadella. While Microsoft’s commercial cloud has an annual run-rate trajectory of $8 billion-plus, we believe its best cloud days are ahead given positive checks from the field around solid uptake of key cloud products (e.g., Office 365, Azure) heading into year-end. To this point, we believe cloud could be a source of upside the next few quarters as Microsoft looks to continue to strike the right balance of growth and profitability around its cloud endeavors with solid momentum/developer support around its flagship Windows 10 platform heading into 2016.”
It’s not nearly as crazy it sounds … or would have sounded a year ago, anyway.
Fueling that growth beyond the mere ongoing natural progression of cloud usage at the consumer and corporate level is the fact that Hewlett Packard Enterprise is not only getting out of the cloud business for itself, but it’s now fronting for Microsoft’s cloud division. Namely, Hewlett Packard Enterprise is going to tap into the power of Microsoft’s increasingly popular Azure to bring customers a so-called hybrid cloud platform.
Beefing up the value of Azure is the fact Microsoft recently unveiled a “container” service for the platform, which allows code to be written but compartmentalized and run separately from Azure, rather than integrated with Azure. It’s another jab at Amazon Web Services, which already offers a comparable container.
That news followed an announcement made in early November that Microsoft and Red Hat (RHT) had partnered up, with Red Hat becoming the preferred provider of Azure for Linux.
And, just a few days ago, Microsoft released its latest version of an enterprise resource planning platform called Dynamics AX, designed to improve user productivity.
Bottom Line for Microsoft Stock
The point is, despite the critics, Microsoft is piecing together a powerful enterprise cloud platform.
That doesn’t make Ballmer wrong, mind you; it would be great if the company would actually disclose to owners of Microsoft stock how well each of its units is doing and how profitable each is.
It doesn’t have to do so for MSFT stock to be a worthy buy, however. Amazon doesn’t offer a great deal of cloud detail, and few have complained. Indeed, most have cheered any cloud success Amazon has mustered, and have assumed its cloud efforts will become monster-sized in the future. In light of recent developments, Microsoft arguably is en route to a far superior cloud product.
Never even mind the fact that every detail Microsoft offers about its cloud businesses will somehow be used against it by its competitors.
Whatever the case, FBR is right … current and would-be owners of Microsoft stock can look forward to the fact that the company’s best cloud days are ahead of it, and MSFT shares are well-poised to benefit from that largely unsuspected growth.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
