Microsoft Soars on Lofty Cloud Demand but Faces Competition

Microsoft is becoming a tech darling once again on strength in its cloud services business - but can it become the top player in the space?
By Tony Owusu ,

Microsoft (MSFT) - Get Report was the subject of a slew of analyst upgrades following the release of the company's fourth-quarter earnings results Tuesday after the closing bell. The tech company was able to beat analyst expectations amid falling PC sales thanks mainly to its cloud services segment performing so well in the quarter.

The stock closed trading Wednesday up 5.3% to $55.91 per share, its highest jump in nine months, after reporting fourth-quarter revenue of $22.6 billion, ahead of analysts' $22.1 billion estimates. The company's bottom line of 69 cents a share was also ahead of estimates by a dime.

Analysts at Deutsche Bank reaffirmed a buy rating and $65 price target while lauding the company's cloud services. Microsoft's commercial cloud business ended fiscal 2016 with an annualized run rate of $12.1 billion, it expects that number to grow to $20 billion by fiscal 2018. The company said nearly 60% of Fortune 500 companies have at least three of its cloud offerings.

"More so than any other mega-cap tech stock, MSFT seems to be navigating the transition to the cloud and subscription model very well," Deutsche Bank analyst Karl Keirstead wrote in today's note. "This, we believe, should offset any weakness in the on-premise portfolio and sustain MSFT's valuation multiple. Downside risks include further erosion in on-premise revs growth."

It wasn't all good news for the company, however, as it forecast a 6% decline in its personal computing segment in the current quarter. The company's implied EPS guidance of 67 cents in the first quarter was short of the bank's own 70 cent per share expectations.

Analysts at Barclays identified Microsoft's transition to the cloud as the main takeaway from Tuesday's release. The firm maintained its overweight rating and $60 price target. The firm noted that the company's EPS beat was helped by lower taxes and higher "other income."

"Rebounds: Microsoft's cloud and annuity business continued to grow well; expected to be the future of the company. However, this quarter we also saw much better transaction results compared to Q3, partly due to a spillover effect," analyst Raimo Lenschow wrote. "Office was a main factor, with Consumer Office growing 19%, partly helped by transaction strength in Japan. Server Products also saw a nice rebound with high-single-digit constant currency growth, and more importantly stabilization in on-prem."

Analysts at BMO Capital Markets were also bullish on the company following the earnings beat. The firm raised its current quarter EPS estimate to 70 cents from its previous 64 cent a share expectation. The firm also raised its price target to $62 from $57.

Despite the gains in the quarter, Growth Seeker holding Amazon (AMZN) - Get Report still maintains a wide market lead in cloud services over second-place Microsoft. Growth Seeker co-manager Chris Versace sees Microsoft as a clear player in the space, but he does not see Amazon giving up its top spot any time soon.

"Microsoft is indeed a Cloud competitor, but Amazon has a lot of levers in its own Cloud business given its footprint among the Fortune 1,000 and offering (that includes the ability to quick ramp up or down services based on customer demand) as well as continuing to drive innovation," Versace said. "Keep in mind that enterprise cloud adoption is still a rising tide that will lift a number of boats."

Microsoft may be able to make the transition from old tech company to new tech company via its cloud business, but it has some stiff competition from an also established company in Amazon before it can claim the top spot.

Editor's Note: This article was originally published at 4:23 p.m. EDT on Real Money on Wednesday, July 20.

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