Microsoft Corp. (MSFT, Financial) was off to a dull start in 2016, but 2017 is an entirely different story as the stock has displayed strong signs of upward momentum this year.
The stock is up nearly 13% year to date. Over the past few several years, Microsoft’s shares have had a great run, and it looks like the company’s impressive run will not end anytime soon.
Microsoft reported mixed third-quarter results in April. In the third quarter, the company logged earnings per share of 73 cents, exceeding the analyst’s estimate by 3 cents. On the other hand, total revenue was $23.56 billion, missing the consensus by $60 million. That figure, however, represents a surge of 6.3% year over year.
As a matter of fact, the PC market has been declining at a considerable rate over the past several quarters. Therefore, Microsoft is struggling to break away from the traditional PC market and aggressively focusing on other growth areas such as cloud and Office 365.
In the most recent quarter, the company crossed a significant milestone with over 100 million monthly active users (MAUs) of Office 365 Commercial. Moreover, Office 365 Commercial seats and revenue grew 35% and 45% year over year.
Microsoft Office and Office 365 have become a significant part of the Productivity and Business Process unit, which generated $8 billion in sales in the company’s latest quarter. The rapid growth of Office 365 subscriptions accounts for the reason why Microsoft becomes the overall leader in enterprise SaaS around the globe.
On the other hand, Microsoft’s cloud business also carries on growing at a healthy rate and will be a significant growth driver for its revenue going forward.
Currently, Amazon AWS leads the IaaS market followed by Microsoft at the second position. Amazon Web Services maintained its 40% cloud market share in 2016 as it snatched business from smaller players. Moreover, AWS’s spectacular growth streak continued in the recently reported quarter as sales surged approximately 43% year over year.
Microsoft is swiftly catching up with Amazon (AMZN, Financial) in the race to tap this growing market. The company now has a commercial cloud revenue run rate of more than $15.2 billion, representing a growth of 52%. Furthermore, revenue from its Azure platform escalated 93% during the most recent quarter.
The aggressive adoption of Microsoft’s cloud service is mainly due to the price cut to challenge Amazon’s cloud platform. Although the company’s strategy of reducing prices to snatch market share from its rivals is pressurizing its bottom line, it believes that it can upsell premium features to its cloud customers once they reside in its ecosystem.
Most importantly, Microsoft cloud business has a 32% operating margin as compared to Amazon Web Services’ 24.5%, suggesting it still has plenty of room to cut its prices. As a result, reducing prices further will certainly help Microsoft grow its market share at a healthy rate in the forthcoming quarters.
Conclusion
Microsoft’s Azure cloud platform now holds the second position, just after Amazon’s AWS. The company is continuously making its Azure platform more affordable to compete effectively against rivals.
According to a forecast report from Gartner, global public cloud services market is expected to grow to 18% this year to $246.4 billion. This suggests that Microsoft, as well as Amazon, still has plenty of room for growth. Also, it can be certainly said that the fierce competition between Microsoft and Amazon will not end anytime soon.
On the other hand, Microsoft also offers a healthy dividend yield of 2.23% which looks impressive. However, the stock currently trades at a price-earnings (PE) ratio of 30.96, suggesting it is slightly overvalued.
As an outcome, existing investors should continue to hold the stock as its long-term prospects look good, but investors seeking to initiate a position in the stock should wait for the right time as it currently trades at its all-time high.
Disclosure: I do not hold a position in the stock mentioned in this article.
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