Market bellwether indexes like the NASDAQ and the Dow Jones Industrial Average have been buoyed by a handful of famous names. One of the most famous of these names is Microsoft (NASDAQ:MSFT), and investors in Microsoft stock have enjoyed outstanding gains as tech continues to power the American and global economies.
The billion-dollar question, then, is whether high prices can lead to even higher prices for this market leader. I would contend that the outlook should remain quite rosy for Microsoft stock due to the company’s innovative drive, especially in the cloud niche as Microsoft’s Azure division continues to put pressure on Amazon’s (NASDAQ:AMZN) competing AWS (Amazon Web Services) cloud platform.
Floating on a Cloud?
Given the current price of Microsoft stock, it’s amazing to consider that the share price was under $100 in mid-December of 2018. Microsoft’s steady run since that time has sparked fear among cautious investors who wonder whether the share price has flown too high, too fast.
The irony is that those who wonder whether Microsoft stock is floating on a cloud, might be forgetting that it’s Microsoft’s cloud platform that delivers so much shareholder value. Amazon’s AWS cloud architecture has received the lion’s share of attention in that domain, but Azure is gaining traction and momentum, along with valuable market share.
A report released by independent analyst firm Canalys sheds some light on Microsoft’s progress in this area, and I would suggest that both Microsoft and Amazon shareholders take note. In 2018 Amazon AWS controlled 36% of the cloud market, but last year that figure dropped to 32.3%; meanwhile, Microsoft Azure’s cloud-market share improved from 14.2% in 2018 to 16.9% in 2019. As a result, the market-share gap between Azure and AWS decreased from 18.5% to 15.4% in just one year.
Granted, Azure’s $18.1 billion in 2019 revenues remains a fraction of AWS’s $34.6 billion, but it’s a fast-growing fraction that’s already more than 50%. Canalys’s report emphasized Azure’s significance in Microsoft’s recent earnings release, observing, “Microsoft Azure’s growth rate was higher in the quarter, as it gained traction in enterprise accounts and benefited from its extensive channel reach. Microsoft stepped up its messaging to partners to drive Windows Server 2008 workloads to Azure as support comes to an end.”
A Dominator in the Making
So, while Microsoft isn’t number one in the cloud space quite yet, Azure’s rate of expansion cannot be discounted. The company’s most recently reported quarter saw an astounding 62% growth in Microsoft’s cloud division, indicating that Microsoft stock, while not cheap, has earned its price tag.
Indeed, it could easily be argued that Microsoft’s impressive fiscal second-quarter earnings results were all about cloud momentum as the company’s commercial-cloud revenues increased to $12.5 billion, an outstanding year-over-year improvement of 29%. Microsoft’s commercial-cloud business now boasts an annual run rate of $50 billion, suggesting the potential for Azure to catch up to AWS and even overtake it in the not-too-distant future.
So, where do we go from here? Analyst firm Evercore ISI, which recently assigned a rating of outperform and a price target of $184.44 for Microsoft stock, sees a not-so-cloudy future for Microsoft’s cloud business as “Azure’s hybrid cloud portfolio and nonconflicted business model… will allow Microsoft to sustain a competitive advantage, with its commercial cloud business eclipsing $100 billion in revenue by fiscal 2024.” I don’t disagree with that projection and suggest that while AWS might be in the lead position at the moment, Azure could have greater momentum and will likely power Microsoft shares through the current year at least.
The Final Word on Microsoft Stock
Amazon’s grip on the cloud market has been strong but may be slipping as Microsoft’s Azure poses a serious threat going forward. As the company’s cloud segment continues to drive Microsoft stock higher, the future looks bright.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets. As of this writing, he did not hold a position in any of the aforementioned securities.