Technology giant Microsoft (NASDAQ:MSFT) holds a 22% share of the cloud computing market. Meanwhile, Amazon (NASDAQ:AMZN) holds a dominant position with a 32% market share. Microsoft’s Cloud segment, led by Azure, contributed the most to its revenue in Q1, propelling the stock 59.5% YTD compared to the Nasdaq (NDX) 37% gain. I believe that with AI integration, Microsoft can catch up to Amazon’s dominance in the cloud market, making me optimistic about MSFT. Let’s find out more.
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Microsoft Azure: A Contender in the Making
Since its inception in 1975, Microsoft has evolved from its humble beginnings into a global tech giant, leading the charge in software, hardware, cloud computing and more. Even before the AI boom took over the tech world, Microsoft ran a successful, profitable business with its diversified operations.
Between Fiscal 2019 and Fiscal 2023, Microsoft’s revenue increased from $126 billion to $212 billion, while its earnings increased from $5.06 per share to $9.68 per share.
Moving on to our main topic, Amazon Web Services (AWS) has emerged as a pioneer in cloud computing, leveraging its first-mover advantage to capture considerable market share. However, Microsoft Azure, often seen as AWS’s most direct competitor, has steadily closed the gap and gained momentum.
Azure thrives on Microsoft’s established enterprise software presence, leveraging synergies with products like Windows Server, Office 365 and Dynamics 365 to attract businesses looking for seamless integration between their existing systems and cloud services.
In addition, Azure’s robust hybrid cloud offerings appeal to businesses dealing with the complexities of digital transformation. For example, Azure Arc solutions now enable more cloud migrations. According to management, Azure Arc acquired 21,000 customers in Q1 Fiscal 2024, a 140% increase year over year.
Since making a significant investment in OpenAI in 2019, Microsoft has integrated AI into all of its products. Azure AI is now driving exceptional cloud growth for the tech giant. In Q1, its Intelligent Cloud segment grew 19% year over year to $24.3 billion, contributing the most to Microsoft’s total revenue of $56.5 billion. Operating income for the segment saw an increase of 31% to $11.75 billion.
In particular, revenue from Server Products and Cloud Services increased 21% in Q1, due to strong growth in Azure and other cloud services. In fact, Azure revenue alone was up 29% year over year. Speaking about the power of the cloud, CEO Satya Nadella stated, “More than 18,000 organizations are now using Azure OpenAI Service.”
By comparison, Amazon’s AWS net sales increased 12% year over year to $23 billion, while the segment’s operating income jumped 30% in its third quarter of 2023.
AI is a Huge Growth Driver for MSFT
Now that Microsoft has incorporated AI into most of its high-grossing products, it is positioning itself for a bright future. Management emphasized in the earnings call that the company is “rapidly infusing AI across every layer of the technology stack and for every role and business process to drive productivity for (its) customers.”
In particular, in Q1, revenue in the Productivity and Business Processes segment jumped by 13%. In Q2, the company expects segment revenue growth in the range of 11% to 12%.
Meanwhile, Personal Computing, which has struggled so far, is slowly recovering, rising 3% year over year in Q1. Also, management expects the $69 billion acquisition of Activision Blizzard (completed in October) to boost its Gaming revenue by a mid to high 40 percent.
Going into Q2, management expects Azure to continue to fuel revenue through increasing contributions from AI. In particular, Azure’s revenue is expected to grow by 26% to 27% in constant currency. Overall, analysts predict that Microsoft’s Q2 total revenue will rise 16% year over year to $61 billion, with earnings of around $2.75 per share.
Amazon’s CEO believes that AWS will add tens of billions of dollars to the company’s revenue in the coming years. Meanwhile, following Microsoft’s Q1 results, DA Davidson analyst Gil Luria stated that increased demand for AI services is propelling Azure to a higher market share against other large cloud service providers. The five-star analyst has a Buy rating on MSFT with a target price of $415.
Long-Term Tailwinds for MSFT
Adding to MSFT’s tailwinds, the management turmoil at OpenAI appears to have been resolved with the reappointment of Sam Altman as CEO. This allays any concerns analysts and investors had about how the Microsoft-OpenAI partnership would affect the company’s generative AI roadmap.
On that note, Mizuho analyst Gregg Moskowitz recently emphasized that Microsoft’s mid- and long-term growth opportunities, as well as generative AI monetization, are undervalued.
In addition, Wells Fargo analyst Michael Turin believes that Microsoft has “a series of favorable long-term tailwinds” and is reasonably valued based on its “growth potential and strategic position.” The firm has a Buy rating with a target price of $425 for MSFT.
Is MSFT Stock a Buy, According to Analysts?
Overall, Wall Street has a Strong Buy rating for Microsoft stock. Of the 34 analysts who cover the stock, 33 rate it a Buy, while one rates it a Hold. There are no sales recommendations. MSFT’s average share price is $412.03, representing 8.8% upside from current levels.
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Priced at 29.7 times forward earnings and 10.3 times forward sales for Fiscal 2025 (ending June 2025), Microsoft’s valuation seems justified for a growth stock. Analysts predict that Fiscal 2025 revenues and earnings will increase annually by 14.7% and 13.9% respectively.
The bottom line on Microsoft
Looking ahead, the cloud market with the golden touch of AI will be dynamic and evolving, providing ample opportunities for Microsoft to challenge Amazon’s dominance. While the battle will be fascinating to watch, I believe Microsoft has the potential to beat Amazon. Plus, with the advancement of generative AI, Microsoft has more growth in other areas of its business to look forward to, making it a compelling tech stock to pick right now.
Disclosure
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.