One of the primary reasons to own Microsoft's (MSFT -0.18%) stock over the past few years has been its cloud computing business. Cloud computing is a massive industry that has propelled Microsoft to new heights.
However, Microsoft has long been silent on how much its Azure product contributes to the overall cloud computing business segment, which hasn't allowed investors to analyze where Microsoft is at in terms of market share.
In Microsoft's earnings call for its fiscal 2023 fourth quarter (ended June 30), CEO Satya Nadella finally revealed a critical figure that clues investors in to how much Azure generates. But is that enough to warrant purchasing Microsoft's expensive stock? Let's find out.
Not so far behind the top dog as many thought
Cloud computing is so important for Microsoft because of the potential market opportunity. One estimate predicts the cloud computing market opportunity to reach $2.4 trillion by 2030. That's a massive pie, but investors have long wanted to know how much Microsoft owns of this industry already. During Microsoft's Q4 conference call, Satya Nadella said:
The Microsoft Cloud surpassed $110 billion in annual revenue, up 27% in constant currency with Azure all up accounting for more than 50% of the total for the first time.
While that's not as exact a figure as some investors (including me) would have wanted, it at least gives a starting point to see where Microsoft is compared to its primary competitors, Amazon Web Services (AWS) and Alphabet's Google Cloud. Assuming that Azure "making up more than 50% of revenue" for the first time means a marginal beat, we can say Azure makes up around 51% of its total revenue. Multiplying that by the $110 billion segment gives us an annual run rate of $56 billion.
An annual run rate assumes that all the revenue generated this quarter will be the same over the next three, so we can estimate AWS and Google Cloud's figures similarly. Using this logic, we see how Microsoft is faring in the cloud computing arms race.
| Company | Estimated Annual Run Rate |
|---|---|
| Amazon | $85 Billion |
| Microsoft | $56 Billion |
| Alphabet | $32 Billion |
Data sources: Amazon, Microsoft, and Alphabet. Note: Amazon uses Q1 run rates, while Microsoft and Alphabet use Q2.
Microsoft stacks up quite well to the industry leader, and with Azure's impressive 26% growth rate, it's taking new customer market share as AWS only grew 16% in Q1 (Amazon reports Q2 results on August 3).
Still, even with the strength of cloud computing, Microsoft only managed to grow revenue by 8% in Q4. However, with a company of Microsoft's maturity, investors should be more focused on earnings growth. From that mindset, Microsoft had a blowout quarter, with earnings per share (EPS) rising 21% to $2.69.
Microsoft's stock is still expensive
With all that in mind, is Microsoft stock a buy right now? Despite having a solid quarter, Microsoft's stock is still very expensive at 34 times earnings.
MSFT PE Ratio (Forward) data by YCharts
In regular operating environments, this is near the peak of where Microsoft is typically valued, so investors must be careful with the stock. Furthermore, Microsoft is expected to grow revenue once again at an 8% pace in fiscal 2024's first quarter, so its growth isn't returning to market-beating levels any time soon.
While Microsoft is doing quite well, I don't think the stock is worth owning individually. If you own an S&P 500 or Nasdaq 100 index fund, Microsoft already makes up 6.8% and 10% of those indexes, respectively. As a result, many investors already own a large amount of Microsoft, so the company must present itself as an outstanding value to purchase shares.
I don't think Microsoft fits that bill right now, so I think investors are better off purchasing some cheaper tech stocks instead. However, if its valuation dips back into the mid-20s price-to-earnings ratio range, I'd be a buyer of the stock.
