Microsoft's 3 Biggest Challenges for 2020

Microsoft's performance this year could be determined in part by further growth in Azure, execution on key strategic initiatives, and ability to weather any potential pullback in corporate tech spending.
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Microsoft  (MSFT) - Get Report investors had a stellar 2019, and are certainly hoping for a repeat performance in 2020.

Shares of Microsoft gained 55% last year, pushing its market cap well past the $1 trillion mark. And bullish analysts see more upside in the year ahead for the tech giant.

That doesn’t mean there aren’t hurdles ahead, however. Here are a few themes to watch for in 2020.

Cloud Wars

Microsoft has a durable second-place position in the growing cloud market, but a formidable opponent in the top spot: Amazon’s  (AMZN) - Get Report AWS, which commandeers roughly 40% of the market for public cloud services, according to Synergy Research Group. Azure’s share was just shy of 20% as of the third quarter.

Much of the optimism around Microsoft’s prospects is tied to Azure, which has gradually gained share alongside growth in the overall market for cloud services, and the company also scored a big win in beating out Amazon for a large and controversial Pentagon contract. For the third quarter, however, slower growth in Azure -- 59% compared to 76% in the prior year -- capped gains. That suggests investors hold high hopes for Azure, but also that Microsoft still has much to prove and a ways to go before it can claim cloud dominance.

Macro Issues

In the back half of last year, some investors worried that slowing economic growth in the U.S. and elsewhere could go hand-in-hand with a pullback in enterprise tech spending. A survey conducted by Morgan Stanley in the third quarter of 2019, for example, found that CIOs anticipated slower growth in IT budgets in 2020 compared to last year. What any pullback would mean for Microsoft isn’t totally clear: While it’s one of the largest tech vendors on the planet, its products are also mission critical to many enterprises.

On an October earnings call, Microsoft’s CFO Amy Hood responded to a question about the demand outlook by emphasizing that it’s “focused on where growth and opportunity exist, and to invest in those areas that are large, expansive, and durable TAM [total addressable market].” Nonetheless, investors will continue to closely watch economic indicators and what they mean for Microsoft in the year ahead.

Newer Businesses

There’s a lot more to Microsoft than Azure, Office 365 and PCs -- three of the products that investors tend to know best. The company has been busily re-investing in initiatives that, if successful, could further strengthen key lines of business such as Azure and its Office suite.

One such example is Microsoft’s Power Platform, an engine that assists developers in building business applications relatively quickly. According to Evercore ISI analyst Kirk Materne, the platform isn’t yet a “needle mover” in terms of Microsoft’s overall top line, but will nonetheless “remain a key focus area for the company going forward and could also help inform Microsoft’s long-term M&A strategy.”

It could contribute around $1 billion in revenue by fiscal 2022, according to Materne. The platform’s strategic value lies in its ability to further tap enterprise spending as businesses look for ways to make developers more productive. In 2020, investors will expect strong execution on Microsoft’s strategic initiatives, and more detail about what they will ultimately mean for the company going forward.