Can Microsoft Ever Matter in the Cloud?

Although I no longer hold the stock, I still find myself defending Microsoft (MSFT -3.57%) quite a bit. That in and of itself might seem like a problem -- when a company of Microsoft's stature needs so much validation. There's still a lot of good in this company, however. This despite the fact that it seems the tech world -- specifically Apple and Google -- has left Mr. Softy in the dust.

And now Microsoft is looking to make up the difference in the cloud. Will it be enough?

Will Microsoft remain a cloud underdog?
Although the popularity of mobile devices has allowed Apple and Google to steal Microsoft's luster, this has not taken away from Microsoft's dominance in enterprise and, in particular, Office and Windows. That 80% of the company's revenue still comes from businesses proves how strong those franchises still are. Nevertheless, with the cloud getting bigger each year, Microsoft has come under considerable pressure.

In Azure, Microsoft has not been asleep at the wheel. And despite what bears may think, the platform is better than adequate. But even though I'm willing to give Microsoft a "glass half-full" thesis in its efforts, I don't think Azure is ready for primetime yet. There was a point, though, when I felt Azure would be a significant player, especially since the cloud market is still fairly short on development tools. Plus, I felt the company's Office 365 solution would have presented a solid software-as-a-service, or SaaS, rival to Salesforce.com and Oracle (ORCL -1.14%). Today, I'm not so sure.

I say this even though Microsoft has recently launched Azure community portal, which invites a wide range of developers to create, thereby increasing a broader adoption of the service. Microsoft also refreshed Azure with a Virtual Machine-centric platform similar to Amazon's (AMZN -2.46%) Elastic Compute Cloud. Going after Amazon is a good strategy, but Azure is still limited in functionality when compared to Amazon's Web Services, or AWS.

However, Microsoft does have an advantage over Amazon by having a much bigger footprint among businesses and enterprise. Plus, it certainly benefits Microsoft by coming up with a way to grow Azure and all that goes into building an ecosystem. The question, though, is to what extent will users embrace Azure. And can Azure offset any decline or narrow the gap in mobile weakness against Apple and Google?

However, there's also Oracle and Salesforce to contend with. As enterprises continue to transition to more SaaS environments, can Azure measure up against these two giants? Microsoft should be able to compete on price and seamless integration, given its strong lead with business customers. Hopefully, these customers won't expect or insist that Microsoft be better. Microsoft will just need to be adequate.

Can the enterprise stay strong?
The recent 9% growth in the server and tools segment suggests that the company is holding its own against the likes of IBM and Oracle. Likewise, Microsoft's SQL business still produces solid results, and the company's Hyper-V product, which rivals VMware's vSphere, is also gaining meaningful share. And if Microsoft can bring Azure up to standard, to the extent that Azure can be within a discussion that includes AWS, this will strengthen Microsoft's enterprise leverage.

The question, though, is how long these businesses can hold down the fort. Unlike Oracle, which has been on an acquisition spree to build its one-stop-shop model, Microsoft hasn't been as active. Plus, it has to address the way virtualization and Big Data are changing the functions of back-office enterprise IT. VMware and EMC are becoming leaders in this area, and so far there's been no response from Microsoft.

While Microsoft's backend products are arguably better, customers are willing to sacrifice extra features to save on costs. And some of these alternatives are tough to resist because businesses can save on support costs since web services such as Gmail don't require an onsite Exchange administrator. What's more, the increase of freeware and products such as Google Apps and Open Office isn't going away.

That said, the company's never really been affected. The question, though, has always been with management and whether it has the capacity to lead Microsoft to what's next. And although bears will argue that Microsoft's no longer first in anything, it doesn't have to be. Hopefully Microsoft's new cloud strategy can be the beginning.

What of the stock?
Grab a Snickers bar. In time, fair value can reach $35 per share, or 20% higher. But in the meantime, Microsoft will pay for your patience as it offers one of the best yields on the market at 3.30%. As has been the case for a while now, value is not the problem. But Microsoft has more work to do to change sentiment. Hopefully, its future gets a bit more cloudy.