While Amazon (NASDAQ:AMZN) still dominates cloud infrastructure, Microsoft (NASDAQ:MSFT) owns the most profitable cloud.
During the third quarter Synergy Research reported that Amazon held 40% of the public cloud market. But Microsoft Azure’s share has nearly doubled since 2016. It now takes nearly 20% of an $89 billion market.
Microsoft also sells applications directly from its cloud. Those tools are used by millions of developers to build their own applications, hosted on both Azure and on other clouds. Microsoft Visual Studio code is now the “default” tool at Facebook (NASDAQ:FB).
But while Amazon could be forced to spin off its cloud, Microsoft seems to be under no such threat, even though Azure is far more vital to its success than Amazon’s cloud is to Amazon.
How long can this continue?
Don’t Be Evil
Microsoft was put into antitrust jail in the 1990s for tying its Internet Explorer browser to the Windows operating system. It didn’t get out until 2011. At that time the stock was trading at half its current price at the top of the dot-com bubble.
Co-founder Bill Gates recently blamed the antitrust case for Microsoft’s failure in mobile, where the bulk of the market now belongs to Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Android.
Three years after antitrust oversight ended, Microsoft committed to the cloud under a new CEO, Satya Nadella. In the last five years the stock is up over 200%. The dividend has increased repeatedly, but its yield is down to 1.4%. Microsoft is a growth stock again. Analysts feel the shares still have room to run.
But Nadella insists that Microsoft is not like Amazon, whose gains it has doubled over the last two years. Nadella argues that Microsoft’s platform adds value to its software industry, while Amazon is an aggregator that takes value from the retail industry.
The argument was good enough for the U.S. Department of Defense, which awarded Microsoft the $10 billion contract for its cloud over Amazon, even though the CIA’s cloud contract with Amazon has worked well for five years.
But growing from a market capitalization of $1.1 trillion requires entry into new markets. Even if that’s successful there could be blowback. An example is Teams, a collaboration tool competing with Slack (NYSE:WORK). Microsoft said in September that Teams now has 20 million users. Slack is off 50% from its June IPO.
The Cloud Conundrum
Clouds create enormous value, but they’re also expensive.
Microsoft, Amazon, Alphabet, Facebook and Apple (NASDAQ:AAPL) have built their clouds with risk capital. The capital gets a return from services provided by the clouds. Synergy Research estimates $28 billion of capital was spent on cloud data centers in the second quarter of 2019 alone.
Previous generations of infrastructure were built with debt. AT&T (NYSE:T) alone has a capital expenditure budget of $23 billion. It also has debt of over $150 billion, with about $5 billion of cash. Microsoft has $66 billion of debt, but $133 billion of cash and short-term investments. Microsoft’s market cap is now over four times that of AT&T.
The Bottom Line on MSFT Stock
Market faith in Microsoft, against the possibility of renewed antitrust action, seems well placed.
Nadella says Microsoft is willing to accept regulation. Microsoft has praised Europe’s General Data Protection Regulation. Microsoft President Brad Smith’s new book, Tools and Weapons, also endorses technology regulation.
Regulation is the briar patch that Microsoft wants to be tossed into. It can be negotiated. Regulation also creates an extra barrier to entry for competitors. It locks in Microsoft’s business advantage.
If you’re buying Microsoft stock today, you’re betting on regulatory capture, as much as you are on software and the Azure cloud.
Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental story, Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL, MSFT and AMZN.
