Wall Street is still trying to gauge the impact of Amazon.com, Inc.’s (NASDAQ:AMZN) proposed $13.7 billion acquisition of Whole Foods Market, Inc. (NASDAQ:WFM). So far, investors have wreaked havoc on a variety of retailers like Kroger Co (NYSE:KR). But there has also been the inevitable buyout speculation. One rumor is that Amazon may buy GrubHub Inc (NYSE:GRUB).
Yet I think there are some longer-term consequences. In fact, it seems one of the big winners is actually Microsoft Corporation (NASDAQ:MSFT).
How so? Well, let’s face it, AMZN will need to devote substantial resources to the deal, which means less attention to its AWS (Amazon Web Services) business. Keep in mind that the company is the dominant player in this category, with roughly 31% of the global market share.
In light of this, it does seem a bit of a head scratcher that AMZN did not instead double down on this — say with an acquisition of ServiceNow Inc (NYSE:NOW) or even salesforce.com, inc. (NYSE:CRM). Note that the cloud industry is massive and growing quickly. According to Forrester, the global spending is expected to increase at a 22% compound annual rate — from 2015 to 2020 — to a whopping $236 billion.
The margins are also hefty, especially compared to the grocery market. As for AWS, this business has represented the lion share of the profits for AMZN, which has allowed the company to make investments in its far-flung operations.
It’s also important to note that the company will inevitably need to deal with complex integration challenges. AMZN has little experience running a brick-and-mortar chain that has over 490 locations. Whole Foods will also bring 91,000 employees. AMZN, on the other hand, already has 341,000.
But the acquisition will not be the only complication. AMZN is investing heavily in a broad array of categories like movie production, Kindle devices, an apparel fashion line and even a delivery service to supplant FedEx Corporation (NYSE:FDX) and United Parcel Service, Inc. (NYSE:UPS).
How Does This Affect Microsoft?
So given all this, the holders of MSFT stock should be encouraged (by comparison, the company has a headcount of 121,000). Management will have more bandwidth and resources to laser-focus on the cloud opportunity.
The good news is that Microsoft has already made great strides. Consider that the company is the No. 2 player in the industry, with roughly 13% of the market share.
During the latest quarter, Microsoft reported that its Azure cloud platform saw a 93% spike in revenues. The Commercial Cloud business is also on track to generate $15.2 billion in annual revenues.
It certainly helps that Microsoft has a trusted brand, an extensive network of developers and a strong portfolio of mission-critical technologies.
At the same time, Microsoft has retooled its legacy systems, such as with Windows, SQL Server and Office. For example, during the latest quarter, the user base for Office 365 Commercial jumped by 35% to 100 million.
Oh, and then there are the acquisitions, such as for Solair (a developer of an Internet of Things platform), Xamarin (the creator of a mobile cross platform system) and Deis (a developer of software for container management). Although, perhaps the most critical was the deal for LinkedIn, which has brought a user base of over 500 million members.
Granted, Microsoft stock is not necessarily cheap, with the price-to-earnings ratio at about 21X. But the company deserves a premium valuation because of its lock-in with customers, solid balance sheet (which includes $126 billion in cash) and reliable free cash flows ($25 billion during the past year).
And more importantly, Microsoft is in a great position to benefit from the megatrend of the cloud, which should provide for steady growth over the long haul.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is the author of various books, including All About Commodities, All About Short Selling and High-Profit IPO Strategies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
