Microsoft (NASDAQ:MSFT) last week delivered an impressive earnings beat in the fourth quarter. Its revenue rose 12% annually to $33.7 billion, beating estimates by $920 million. Its adjusted EPS climbed 21% to $1.37, topping expectations by $0.16.

Much of that growth came from its commercial cloud revenue, which surged 39% annually to $11 billion. Once again, the unit's fastest-growing business was its cloud infrastructure platform Azure, which grew its revenue 68% annually in constant currency terms.

That's a stellar growth rate for the world's second-largest public cloud platform after Amazon (NASDAQ:AMZN) Web Services (AWS), but it still marks a deceleration from its 70%-80% growth in previous quarters. Should investors be concerned about that slowdown?

A graphical depiction of a laptop linked to a cloud computing network.

Image source: Getty Images.

Why Azure matters

Microsoft's commercial cloud revenue comes from three main services: its Office 365 productivity suite, its Dynamics 365 bundle for customer relationship management (CRM) services, and Azure.

Azure is a public cloud infrastructure platform that lends computing power and storage to companies. It also cross-sells additional services, including AI, IoT, and analytics tools, to those customers. Demand for Azure surged in recent years as companies have migrated their applications to the public cloud, which is generally cheaper, easier to manage, more secure, and more scalable than private cloud networks.

Microsoft doesn't disclose exactly how much revenue Azure generates, but Nomura analyst Christopher Eberle estimates that it generated $13.5 billion in revenue in fiscal 2019. That's significantly less than the $25.7 billion in revenue AWS generated for Amazon last year, but Azure is growing at a much faster clip than AWS. 

Amazon's AWS revenue rose 47% last year. Azure's revenue growth rate stayed much higher over the past year:

YOY revenue Growth

Q4 2018

Q1 2019

Q2 2019

Q3 2019

Q4 2019







Year-over-year revenue growth. Note: Changes are based on constant currency figures. Source: Quarterly reports.

The main tailwinds

During the fourth-quarter conference call, Microsoft CEO Satya Nadella claimed that 95% of Fortune 500 companies used Azure for "mission-critical" workloads, and highlighted its recent deal with AT&T as one of its "largest cloud commitments to-date." Microsoft also previously secured partnerships with major retailers like Walmart, Walgreens, and Kroger, all of which prefer to use Azure instead of feeding Amazon's biggest profit engine.

Servers in a data center.

Image source: Getty Images.

Nadella noted that Azure's data centers now reach 54 regions in 140 countries, "more than any other cloud provider" in the world, and that Azure now ranks first in the Middle East and Africa. AWS is currently available in 21 regions, but it still has a wider reach than Azure with 66 availability zones across 190 countries.

Nadella attributed Azure's growth to its expanding portfolio of cloud services, which meet companies' edge computing, identity, management, security, and other infrastructure needs. Newer services include Azure Sphere, which secures billions of IoT devices; Azure Cognitive Services, a suite of tools for developing AI-powered programs; and Azure Sentinel, a cloud-based security platform for analyzing threats.

CFO Amy Hood noted that Microsoft "closed a record number of multi-million dollar" commercial cloud deals in 2019, including "material growth in the number of $10 million-plus Azure agreements." Just as in previous quarters, Hood explained that Microsoft's commercial cloud gross margin expanded -- six percentage points annually to 65% this time -- thanks to a "significant improvement" in Azure's gross margin.

No, Azure isn't losing its spark

Hood noted that Azure's revenue mix was gradually shifting toward lower-margin consumption-based (pay per use) services instead of dedicated subscriptions, but that she still expects "meaningful improvement" to Azure's gross margin in the first quarter as its total revenue rises.

Moreover, the U.S. Defense Department plans to award its $10 billion Joint Enterprise Defense Infrastructure (JEDI) cloud contract to either Azure or AWS in the near future. Microsoft didn't discuss that potential deal during the call, but winning that deal would light a fire under Azure again.

Simply put, investors shouldn't worry about Azure. It's still growing faster than AWS, it's locking in big enterprise customers, and it still has plenty of massive growth opportunities like JEDI on the horizon. The growth of Azure, along with the strength of Office 365 and Dynamics 365, should enable Microsoft's commercial cloud business to remain its core growth engine for the foreseeable future.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.