Home / Tech / A Wall Street analyst found that Microsoft's all-important cloud business just crossed a major milestone, and it could mean great things for investors (MSFT, AMZN, GOOG, IBM)

A Wall Street analyst found that Microsoft's all-important cloud business just crossed a major milestone, and it could mean great things for investors (MSFT, AMZN, GOOG, IBM)

Satya Nadella

  • A Wall Street analyst says Microsoft’s strengthening cloud business should lead to better margins, and upgraded the stock from hold to buy.
  • The analysis was based on last week’s Microsoft report when the tech giant’s Intelligent Cloud business posted higher revenue than other key units for the first time ever. 
  • CFRA further found that Microsoft’s overall cloud businesses — including Azure, Office 365, LinkedIn, GitHub, Bing, and Xbox Live — now appears to account for as much revenue as the tech titan’s more traditional businesses. That’s a key milestone for Microsoft, amid its cloud business. 
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Microsoft’s cloud business is getting stronger, which a Wall Street analyst expects to lead to better profit margins.

CFRA analyst John Freeman upgraded Microsoft to buy from hold citing the tech behemoth’s “faster growing cloud businesses,” which he projects to have better profit margins than its more traditional software products. 

“As revenue from these faster-growing cloud businesses begin swamping non-cloud revenue, margins will continue to improve,” Freeman told clients in a note.

Microsoft posted results last week that highlighted a strengthening cloud business. In fact, the company said its Intelligent Cloud segment, which houses the Microsoft Azure cloud platform, recorded more revenue than the other two businesses, which are responsible for selling major Microsoft products like Office and Windows. That’s the first time this has happened since those three business units were incepted in 2015. 

After emerging as a tech powerhouse mainly by selling software for PCs used by consumers and businesses, Microsoft recently pivoted to the enterprise cloud market. Last week’s report showed that transition was clearly paying off.

In Freeman’s analysis, Microsoft’s report also suggested that its cloud businesses — including Azure, Office 365, LinkedIn, Bing, GitHub, and Xbox Live — are bringing in as much revenue as its more tradtional lines of business. That’s a key milestone for the company amid its cloud transformation. 

Freeman said the company, for the first time, “generated as much revenue from running software in its own data centers…as it did from software licenses and upgrades, hardware and professional services.”

Microsoft doesn’t break out revenue figures for all of those lines of business. For instance, while Microsoft said that Azure revenue was up 64% from the same period of 2018, it doesn’t give specific dollar amounts. That makes CFRA’s analysis especially noteworthy  

Microsoft, whose valuation now tops $1 trillion making it the most valuable company inthe world, recently said its revenue for for fiscal 2019 rose 12%. It reported a gross margin of 69% — a figure that seems set to improve, by CFRA’s analysis, as the company continues its march to the cloud. 

Freeman boosted his price target to $177 from $130 “based on increasing cloud migration success and greater realization of the operational leverage inherent in its cloud businesses.”

Microsoft shares have jumped more than 35% this year and closed trading on Monday at $138.43. 

The Redmond, Washington-based company’s dominant position in enterprise was reaffirmed Monday when analyst firm Gartner named Microsoft, together with Amazon and Google, among the three leaders in the infrastructure as a service market, a key arena in cloud computing. 

Amazon had the edge in the $25 billion public cloud market, with 46% market share, according to IDC’s 2017 data. Microsoft was second with 11%, followed by IBM with 5.6%, Alibaba Group with 4.5% and Google with 3.3%.

The competition between Microsoft and Amazon recently escalated after they became the final contenders for the Pentagon’s $10 billion contract to build the Joint Enterprise Defense Infrastructure, or JEDI, which is expected to be the biggest public cloud project ever. The Defense Department was expected to announce the winner next month, but President Trump’s statement that he wanted more information on the contract process could delay the project. 

Got a tip about Microsoft or another tech company? Contact this reporter via email at bpimentel@businessinsider.com, message him on Twitter @benpimentel. You can also contact Business Insider securely via SecureDrop.

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