The odds of winning a million dollars in Vegas is higher than the odds of going through an analyst report about Microsoft Corporation (MSFT) without reading about how MSFT failed to be relevant during the smartphone revolution. This part of Microsoft has been hackneyed. It’s just the same old soup — or e sempre la solita minestra in Italian.
However, the latest earnings from MSFT have investors and analysts optimistic again about the future of Microsoft. For the most part, the newfound optimism stems from the impressive results from Microsoft’s cloud business.
MSFT said its cloud business now has an annualized revenue run rate of over $12 billion, with CEO Satya Nadella saying its cloud business is on track meet the $20 billion run rate target in fiscal 2018. In fact, if MSFT continues growing its cloud business at this rate it could hit that target in fiscal 2017.
Amazon.com, Inc. (AMZN) is, by far, the leader in the cloud wars, with Amazon Web Services owning over 30% of the market as of the end of 2015. Microsoft was second with just nine percent of the market.
But with the growth MSFT is seeing in the cloud, should AMZN be worried?
AMZN Will Main Its Leading Position in the Cloud
To be realistic, AMZN will continue to lead this market by a wide margin for the foreseeable future. While MSFT is growing its cloud business, Amazon keeps on forging ahead as well. Goldman Sachs recently said that, as of the end of the first quarter, AMZN had recognized about $8.9 billion in revenue from Amazon Web Services for the trailing-12-month period. And more impressive is the fact that AWS grew by 72% year-over-year during that time frame.
Second-positioned Microsoft had just $1.8 billion for the trailing-twelve-month period up until the end of the first quarter. Although it saw a 115% year-over-year growth, Amazon’s growth rate on such a huge revenue overshadows this.
Moreover, AMZN has also ramped up investment in widening its Availability Zone this year, according to Goldman Sachs. With cloud adoption rate still high, this investment positions AMZN to extend its leading position in the cloud wars.
Another recent report from Gartner suggests that Amazon is the most innovative of all cloud wars competitors — and that this will make Amazon maintain its leading position for a long time.
All evidence points to the fact that Amazon shouldn’t be overly worried about MSFT at current levels.
Microsoft Is Likely To Close the Gap over the Long Haul
During Microsoft’s latest earning call, execs were trying to reinforce a theme for the company’s cloud business. It’s something along this line: “Our deep relationship with the enterprise world gives us an advantage.” Of course, it does.
According to another Gartner report, we learned about how cloud is struggling to gain the confidence of industries that are heavily regulated, including insurance, banking and the government. In short, any industry where security matters a lot is hesitant to adopt cloud computing. The aviation industry would be another one.
For one, many companies in these industries are already deeply invested into Microsoft’s services.
The existing relationship with them obviously gives Microsoft a first-hand insight into their concerns. Indeed, MSFT is using this advantage to build its cloud business. That is probably the reason it is branding itself as a “hyperscale-plus-hybrid” cloud provider, since hybrid cloud computing alleviates security concerns.
For instance, Nadella said during the call that, “More than 80% of the world’s largest banks are Azure customers because of our leadership support for regulatory requirements, advanced security and commitment to privacy.”
Another example would be the recent announcement that Boeing Co (BA) is moving to MSFT’s cloud. As a reminder, Boeing operates in the aviation industry where security matters a lot due to terrorism risks.
If Microsoft can continue to assure players within these industries that their businesses are safe in its hands, then it would probably control this niche, which would probably be more lucrative due to the high focus on security. The connected car and its insurance industry will also trust MSFT more for better security.
Bottom Line
I am a fan of both Amazon and Microsoft, and I believe both are companies to have in one’s holdings. However, as for the cloud wars, Amazon will be ahead by a wide distance.
However, over the long haul, I believe Microsoft will become a problem for Amazon.
As of this writing, Craig Adeyanju did not hold a position in any of the aforementioned securities.
