tiprankstipranks
Can Microsoft Challenge Amazon’s Cloud Market Dominance?
Stock Analysis & Ideas

Can Microsoft Challenge Amazon’s Cloud Market Dominance?

Story Highlights

Artificial intelligence is altering the growth of tech companies. With Microsoft’s AI-led cloud strength fueling its fundamentals, the likelihood of the company challenging Amazon’s dominant position appears to be high.

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’s (NDX) 37% gain. I believe that with AI integration, Microsoft can catch up to Amazon’s dominance in the cloud market, making me bullish on MSFT. Let’s find out more.

Microsoft Azure: A Contender in the Making

Since its inception in 1975, Microsoft has evolved from its humble beginnings to a global tech giant, leading the charge in software, hardware, cloud computing, and more. Even before the AI hype took over the tech world, Microsoft had run 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 have surged from $5.06 per share to $9.68 per share. 

Moving on to our main topic, Amazon Web Services (AWS) emerged as a trailblazer in cloud computing, capitalizing on its first-mover advantage to capture a sizable market share. However, Microsoft Azure, often regarded as AWS’s most direct competitor, has been steadily closing the gap and gaining momentum.

Azure is thriving on Microsoft’s established enterprise software presence, utilizing synergies with products such as Windows Server, Office 365, and Dynamics 365 to attract businesses looking for seamless integration between their existing systems and cloud services.

Furthermore, Azure’s robust hybrid cloud offerings are appealing to businesses dealing with the complexities of digital transformation. For instance, Azure Arc’s solutions are now enabling more cloud migrations. According to management, Azure Arc gained 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 by 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.

Notably, revenue from Server Products and Cloud Services surged 21% in Q1, owing to strong growth in Azure and other cloud services. In fact, Azure’s revenue alone increased by 29% year-over-year. Talking about the strength of the cloud, CEO Satya Nadella stated, “More than 18,000 organizations now use Azure OpenAI Service.”

Comparatively, 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-revenue-generating products, it is positioning itself for a bright future ahead. Management highlighted in the earnings call that the company is “rapidly infusing AI across every layer of the tech stack and for every role and business process to drive productivity gains for [its] customers.”

Notably, in Q1, revenue in the Productivity and Business Processes segment jumped by 13%. In Q2, the company anticipates segment revenue growth in the range of 11% to 12%.

Meanwhile, Personal Computing, which has struggled so far, is slowly recovering, increasing by 3% year-over-year in Q1. Also, management expects the $69 billion Activision Blizzard acquisition (completed in October) to boost its Gaming revenue by a mid-to-high 40s percentage.

Going into Q2, management expects Azure to continue fueling revenue with rising contributions from AI. Notably, Azure’s revenue is forecast to grow by 26% to 27% in constant currency. Overall, analysts predict Microsoft’s Q2 total revenue to jump by 16% year-over-year to $61 billion, with earnings of around $2.75 per share.

Amazon’s CEO believes AWS will add tens of billions of dollars to the company’s revenue in the coming years. Meanwhile, following Microsoft’s Q1 results, D.A. Davidson analyst Gil Luria stated that increased demand for AI services is propelling Azure to a higher market share versus 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 resolved with the reappointment of Sam Altman as CEO. This dispels 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 highlighted that Microsoft’s medium- and long-term growth opportunities, as well as generative AI monetization, are being undervalued.

Additionally, Wells Fargo analyst Michael Turin believes Microsoft has a “series of favourable long-term tailwinds” and is reasonably valued based on its “growth potential and strategic positioning.” 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. Out of the 34 analysts that cover the stock, 33 rate it a Buy, while one rates it a Hold. There are no Sell recommendations. The average MSFT stock price is $412.03, representing 8.8% upside from current levels.

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 forecast Fiscal 2025 revenue and earnings to increase year-over-year 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 defeat Amazon. Furthermore, 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 now.

Disclosure

Trending

Name
Price
Price Change
S&P 500
Dow Jones
Nasdaq 100
RUT
Russell 2000
TNX
10-Yr-Bond
Bitcoin

Popular Articles