Analysts haven't been shy about expressing their positive sentiments for Microsoft's (NASDAQ:MSFT) cloud business. Many of them believe that cloud computing will continue to bring huge revenue opportunities for the company and drive its earnings for years to come.
Here are just a few examples of what they've said over the past six months (emphasis added):
- Rodney Nelson, Morningstar:
"Public cloud represents a monumental opportunity for Microsoft as new workloads increasingly shift to the cloud, and the firm has curated a rich set of software and tools that will help keep developers in the ecosystem."
- Kirk Materne, Evercore ISI:
"Overall, we believe Microsoft remains well positioned to deliver steady top line and bottom line growth over the next 3-5 years given the breadth of its cloud portfolio, its growing annuity revenue base, and its strong balance sheet."
- Michael Nemeroff, Credit Suisse:
"A stronger than expected Q1 driven mostly by revenue and margins outperformance in its Commercial Cloud (CC) segment... likely sets the stage for further EPS upside in F2018."
Microsoft is proving these analysts right, particularly with its latest quarterly results, as the company has focused its attention on building out one of the biggest cloud computing platforms on the market.
Why these analysts are right
Microsoft has been bullish on its cloud prospects for the past couple of years. Back in 2015, Microsoft CEO Satya Nadella said that the company would achieve an annualized run rate (ARR) of $20 billion for its commercial cloud business by mid-2018. At the time, Microsoft's commercial cloud run rate was just $6.4 billion.
Nadella's goal was met when the company reported its fiscal first-quarter 2018 earnings last month and its commercial cloud ARR hit $20.4 billion. That's several months ahead of Nadella's schedule, which indicates just how fast the company's cloud services revenue is growing.
Microsoft said that Azure storage customers -- part of its overall commercial cloud business -- nearly doubled in the quarter and that revenue grew by 90%.
On the earnings call, CFO Amy Hood said:
"Our commercial cloud business had another quarter of robust revenue growth and material gross margin improvement. Revenue exceeded $5 billion this quarter, growing 56% year-over-year and gross margin increased 8 points to 57%, with improvement in each cloud service, most notably in Azure."
In short, Microsoft's cloud business is thriving, it continues to add new customers, and all of this is helping to the expand the company's margins -- which are up two percentage points to 66% -- all of which should lead to increased earnings.
Microsoft is still transitioning away from some of its legacy businesses, but it's clear the the company is moving quickly ahead to the massive cloud market, which will be worth an estimated $411 billion by 2020.
Analysts will likely keep looking to Microsoft's cloud business as a key revenue and earnings driver, and they should. The only thing I'd recommend to Microsoft investors is that they keep a close eye on the competition. Microsoft's results make it clear that the cloud is the place to be, and they won't be the only big tech name trying to grab a bug chunk of the cloud market.
For instance, Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL) is using its machine learning tools to lure more developers to its Google Cloud platform, and the company has set its own goals for making its cloud service one of its key businesses.
For now, though, Microsoft is doing a fantastic job, and giving its investors much to look forward to.