Microsoft's Cloud Business Pushes Shares Up, but Concerns Remain
Driven by its cloud business, Microsoft (MSFT) - Get Report reported strong fiscal fourth-quarter earnings Tuesday after the market closed, helping push shares of the technology giant up for an amazing one-day gain of more than 5% on Wednesday.
But investors should consider the stock's valuation, how much growth is likely in Microsoft's cloud business and how reliant they want to be on this one unit before jumping in.
Microsoft reported quarterly revenue of $22.6 billion, higher than analyst's estimates of $22.1 billion and up 2% from a year earlier. Excluding one-time charges, Microsoft's earnings were 69 cents a share, well above expectations of 58 cents a share.
Office consumer products and cloud services experienced 19% revenue growth, while Office commercial products and cloud services increased revenue by 5%. Office 365 consumer subscribers increased to 23.1 million, while the commercial side of Office 365 posted revenue growth of 54%.
Microsoft's intelligent cloud revenue grew 7% to $6.7 billion as its Azure division's revenue increased by 102% year over year.
The company also reported that Surface revenue rose 9%, while Xbox Live monthly users grew by 33%. Microsoft experienced a 71% decline in its phone business revenue as the company winds down its Nokia phone unit.
Microsoft's quarter was strong, but investors still need to tread cautiously. Although Microsoft's cloud services business looks like a great alternative to the cloud businesses at Amazon, IBM's or even Alphabet, the company's main growth opportunity appears to be more and more reliant on this business.
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In the past, Microsoft suffered when it was late to the smartphone game after being so heavily reliant on its Office unit. Although this earnings report certainly indicates Microsoft can be a real player in cloud-based services, the hope is that the company doesn't this time lean too heavily on one business, in this case, its cloud unit.
Microsoft is competing with the big guns in the cloud arena, as well as smaller, agile companies such as Demandware, Jive Software and SalesForce. Smaller players can offer a more focused relationship, while companies such as Amazon can and sometimes do essentially give their services away for zero profit in order to build their customer base.
Investors who want to own Microsoft must keep an eye on the cloud business as a whole and understand that the company's revenue stream is changing, which means valuing Microsoft differently than in the past.
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This article is commentary by an independent contributor. At the time of publication, the author held positions in Alphabet, Amazon and Microsoft.