Microsoft’s Azure To Boost Cloud Revenues In The Coming Years

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Microsoft (NASDAQ:MSFT) launched its Azure platform in 2010, and since then it has posted triple digit growth. Azure services are built out on the public, private, or hybrid cloud, and some of the services are available under different cloud umbrellas (infrastructure-as-a-service (IaaS) and platform-as-a-service (PaaS).  And last fiscal year Azure generated over $1.2 billion in revenue, according to reports. The company continues to launch new products, including those discussed at the recently concluded AzureCon. The company unveiled new features for the Azure Data Lake Store and a cloud-based scalable analytics tool to better manage the cloud-based data. [1] This is relevant as the company tries to expand its footprint in the fragmented cloud analytics market. In this note, we explore the new offering and how Azure will boost Microsoft’s cloud revenue.

See our complete analysis of Microsoft here

Azure Data Lake And Analytics

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The Azure data cloud simplifies managing large swaths of data and does all types of processing and analytics across platforms and languages. It can also be integrated with legacy systems for identity management and security for extension of existing data applications. One of the key features of Azure Data Lakes is scalability that can be achieved for Apache Hadoop, Spark, HBase, and Storm clusters.

Microsoft’s Cloud Strategy And Revenue Opportunity

Currently, Microsoft makes $90 billion revenues annually. Most of its revenue stems from sale of perpetual software licenses such as Windows OS, Windows Office and SQL server to enterprise clients. However, over the past few years, a host of factors have forced Microsoft to extend its services in the cloud domain. Declining sales of PCs  lower demand for the associated  software. Also a factor is the price sensitivity of clients that want to cut down their costs and only pay for services that are rendered, based on the scale of operations. As a result, Microsoft has adopted a cloud first strategy to bolster its revenue in the coming years.

The Microsoft’s vision of cloud services allows customers to offer not only standalone applications, but also to interact seamlessly with Microsoft infrastructure and on-site applications such as Hyper- V, Windows Server and System Center, as well as other SaaS offerings. Over the past few years it has invested close to $15 billion to build its cloud infrastructure. [2] The company said that Microsoft’s cloud computing business (which includes revenues from Azure, Office 365 and Dynamic CRM online) is on track to generate over $20 billion in revenues by FY 2018.   (Fiscal years end with June). In its fourth quarter earnings (For FY15), the company announced that it annualized commercial cloud run-rate surpassed $8 billion. Furthermore, according to Gartner research, Microsoft Azure is a a leader in public cloud market and ranks second behind Amazon Web Services in its Magic Quadrant. [3]

Microsoft is trying to close the gap between itself and Amazon’s AWS services through lower prices and by rapidly introducing new features to its Azure platform. At the recently concluded Azurecon, Microsoft said that it continues to add 90,000 new subscribers each month for its Azure platform. Furthermore, over 1.5 million databases are running on Azure, together with over 777 trillion storage transactions each day.

We believe that Microsoft continues to leverage its brand, existing customer relationships, history of running global-class consumer Internet properties and engineering prowess to sell its Azure (Cloud, IaaS and PaaS) services. If this were to happen, and Azure’s share were to increase 15% of total PaaS and IaaS market (estimated at $84 billion by 2020) then Azure’s revenues can increase from $1.8 billion  (estimated at the end of FY2015) to over $12 billion by 2020. This could result in a 15% upside to our current price estimate.

We have $44.12 price estimate for Microsoft, which is inline with the current market price.

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Notes:
  1. Microsoft expands Azure Data Lake to unleash big data productivity, September 28 2015 []
  2. Reference from Microsoft cloud site []
  3. Microsoft Named a Leader in Gartner’s Public Cloud Storage Services for Second Consecutive Year, June 26th 2015 []