Microsoft (Shutterstock photo)
There’s a battle brewing in the cloud market, where tech leaders like Amazon (AMZN), Microsoft (MSFT) and Google (GOOG , GOOGL) are jostling for position. But one analyst believes Microsoft is where to place your bets in 2018.
The cloud services technology supercycle is set to explode, driving higher enterprise spending on public and private clouds, according to recent data from IDC.
"Over the next three years spending on Infrastructure as a Service will be 15% more than spending on on-premises compute, storage, and networking infrastructure,” IDC states.
This trend will continue the ongoing transition with how companies shift their investments from capital expenses to operating expense.
These cloud trends, among others, is one reason Daniel Ives, analysts at GBH Insights, is bullish on Microsoft shares, despite the fact they’re trading at near all-time highs. The blue-chip Dow component has seen its stock rise 33% year to date, while climbing some 40% over the past year, besting the S&P 500 in both spans.
Microsoft stock has been rewarded for CEO Satya Nadella’s cloud-first strategy, which has catapulted the company to become a credible cloud threat not only to Amazon’s dominant AWS cloud platform, Microsoft is also challenging leading cloud player and, arguably the industry’s pioneer, in Salesforce.com (CRM). In the most recent quarter, the Redmond, Wash.-based tech giants posted a 89% year-over-year jump in Azure revenue. And Ives expects this trend to continue Well into 2018.
"Based on our checks, Microsoft has clear momentum in the field and especially among partners, with Commercial Cloud now exceeding a $20 billion run rate, a number that the skeptics thought 'was a pipe dream' a few years ago," Ives said in a note to investors.
All told, Microsoft’s cloud business continues to exceed even the most-bullish Wall Street expectations. And with Ives and his team forecasting a 35% increase in the number application workloads expected to move to the public and hybrid cloud over the next year, Microsoft — thanks to its extensive network of more than 70,000 global partners, Ives noted — has a strong shot to match Amazon’s dominance.
"While AWS remains in a formidable position, we believe Microsoft's Azure platform, Office 365, and enhanced AI capabilities coupled by a major partner and sales force push is a unique value proposition that puts Microsoft in a differentiated position to drive cloud sales for 2018 and beyond and help shape the future growth trajectory in Redmond," Ives argues.
Plus, with the company still working to shift the cloud business toward higher-margin services such as Office 365, Ives expects higher profits in 2018 and thus a higher stock price. The firm has the equivalent of a Buy rating on MSFT stock with a 12-month price target of $95, suggesting additional premiums of around 16%. And that’s excellent value when combined with its 2.02% annual dividend yield.