Microsoft’s cloud story has become so compelling that Dan Ives is convinced it’s turned the company stock into a best buy.
Ives, a financial analyst who covers the company for Wedbush, added Microsoft’s shares to the firms’ best ideas list, arguing that growth in the company’s cloud business will push its market capitalization up past $1 trillion this year. The cloud market is shifting in Microsoft’s direction, and company CEO Satya Nadella has positioned the software giant to benefit from that evolution, he said.
“Microsoft remains in an enviable position heading into the next 12 to 18 months,” Ives said in a research note on Monday. The company, he continued, “is only in the early innings of a transformational cloud story poised to play out over the coming years.”
Under Nadella, Microsoft has turned the cloud market into a two-horse race with early leader Amazon, Ives said. With enterprises quickly moving their computing workloads to the cloud and to hybrid architectures that merge cloud computing resources with proprietary servers, the software giant is in position to see its cloud revenues surge.
Some 30% of enterprises’ application loads are now in the cloud, Ives estimated. By the end of this year, 38% should be in the cloud or in hybrid architectures, and that portion will grow to 55% by 2022, he said.
Microsoft is in a prime position in the cloud market
Microsoft, though, could benefit disproportionately from that shift. Cloud customers are increasingly demanding the ability to tap into artificial intelligence and machine learning services, Ives said. Those are areas in which Microsoft has invested heavily and where it appears to have a competitive advantage over Amazon Web Services, the ecommerce giant’s cloud business, he said.
“Nadella & Co are in the catbirds seat to get more of these complex workloads,” Ives wrote.
What’s more, Microsoft has built up a network of some 70,000 partners that are developing applications for its cloud service and customizing the service for end customers, Ives said. That’s more partners than Amazon, Google, and Salesforce have combined, he said. That network, plus Microsoft’s collection of resellers, also put it in a good position to win new customers and increase it share of the cloud market, he said.
AWS and Microsoft “remain the clear leaders … in converting enterprise customers in the shift to cloud, with our data points indicating that partners are playing a more vital role driving this decision going forward, a dynamic that disproportionately benefits [Microsoft] especially among the all-important [small and medium-sized businesses],” Ives said.
The company’s cloud has other things going in its favor, he said. Microsoft already has a “massive” customer base, to which it can market its cloud services, he said. Both business and consumer customers are already converting over to the cloud version of its Office 365 productivity software from the older licensed download versions. And the company still has plenty of opportunity to upsell its customers on its newer cloud and online offerings, most notably LinkedIn, said Ives, who reiterated his outperform rating and $140 price target on Microsoft’s shares in the report.
“This combination of dynamics should enable Nadella to further transform [Microsoft] into a cloud behemoth over the coming years,” he said.
Microsoft has a 50% chance to win the JEDI contract
And there’s one more thing Ives is bullish about in terms of Microsoft’s cloud effort — the company now stands an even 50-50 chance of winning an important and lucrative new defense contract, he said. As recently as a year ago, Amazon’s chances of winning the Joint Enterprise Defense Infrastructure (JEDI) contract — worth $10 billion over the next decade — stood at about 80%, he said. Both companies have advocates and detractors in Washington, D.C., but Microsoft has made up ground on Amazon in the competition over the last six months, Ives said, citing unnamed sources in the nation’s capital.
If Microsoft gets the contract, it would be huge for the company’s cloud business, for the larger cloud market — and for the software giant’s stock, he said.
“It would be a transformative win that would propel the company’s cloud ambitions throughout the government and enterprise circles,” Ives said, adding that it would have “a major ripple impact for the coming years currently not built into [Wall] Street estimates.”
In late afternoon trading, Microsoft’s stock was up 69 cents, or about 1%, to $111.66.