Microsoft Corp.'s (MSFT, Financial) turnaround seems to be more than complete as the company fired on nearly all cylinders during the fourth quarter of fiscal 2017. Between first-quarter 2016 and fourth-quarter 2017, revenue growth has moved from the low point of 12.16% decline to a growth of 13.11%. The more personal computing segment remained weak and declined steadily throughout this period, while growth was fuelled by the cloud-driven segments: productivity and business processes and intelligent cloud.
Microsoft’s momentum in the cloud computing segment accelerated over the last four quarters. As shown in the chart below, commercial cloud annualized revenue growth accelerated from 48.94% to 56.20% in the third quarter.
The reason why this matters is things are not getting any easier for any vendor in the cloud segment. We now have Amazon (AMZN, Financial), Microsoft, IBM (IBM, Financial), Alphabet (GOOG, Financial) (GOOGL, Financial) and Oracle (ORCL, Financial) fighting for every cloud dollar possible, and each company has its own strengths and weaknesses. Microsoft’s momentum does defy the odds of what is happening in the market. Although it is too early to say, there is a good chance the company is slowly getting ahead of the pack.
Case in point is IBM’s cloud revenue growth. IBM also uses a cloud run-rate number to show its growth rate. During its second-quarter 2017 (ended on June 30) earnings report, IBM reported its cloud-as-a-service annual run-rate grew 32% compared to the prior period.
While that might look a reasonable level of growth, it pales in comparison to IBM’s past performance. The segment's annual run-rate grew 61% during first-quarter 2017 and 63% during fourth-quarter 2016. Historically, IBM’s cloud growth rate has been a bit slow during the April to June quarter, but during the second quarter of 2016, this segment posted 50% growth, much higher than the 32% the company reported during the recent quarter.
Amazon reported $4.22 billion in sales for its web services during its second quarter, a growth of 42.07%, marginally lower than its growth rate in the first quarter of the current fiscal and a full 16% lower than the growth rate it recorded for the second quarter of 2016.
To be fair to Amazon, it is just going through a natural growth process that any company of its size would go through. As its total revenue number keeps getting bigger and bigger with each passing quarter, the growth rate is slowly coming down. This trend is illustrated in the chart below.
The only company that has defied the natural laws of size is Microsoft over the past three quarters. If the trend continues for a few more quarters, Microsoft will have a sizeable lead in the cloud computing segment, making it extremely hard for other players in the market to catch up.
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Disclosure: I have no positions in the stocks mentioned above and have no intention of initiating a position in the next 72 hours.
