The cloud-computing revolution continues apace. Earnings reports from both Microsoft and Alphabet on Tuesday provided compelling fresh evidence that enterprise-technology spending continues to shift aggressively to the cloud giants, including
Azure, Google Cloud and
com’s Amazon Web Services. In a world struggling to navigate inflation, product shortages, Covid and a land war in Europe, the remarkable growth of cloud computing continues unabated.
Microsoft (ticker: MSFT) posted revenue for the fiscal third quarter ended March 31 of $ 49.4 billion, up 18% from a year ago, and close to $ 2 billion above Street consensus estimates. While there was some noise in the numbers — a partial quarter of recently acquired Nuance Communications, worse-than-expected foreign-currency headwinds, a small hit from the shutdown of new business in Russia — the company nonetheless beat expectations in all three of its business segments, including cloud, applications, and personal computing.
The company’s “commercial cloud” business, which includes Azure, Office 365 Commercial, LinkedIn’s commercial business, and Dynamics 365, had a combined revenue of $ 23.4 billion, up 32% from a year ago, and putting the Microsoft Cloud business on a nearly $ 100 billion run rate. Commercial bookings in the quarter were above expectations, increasing 28%, or 35% adjusted for currency. Azure grew 46%, or 49% adjusted for currency, and well above Street estimates. And the company said Azure will grow 47% on a currency-adjusted basis in the June quarter, which was ahead of Street expectations as well.
Alphabet reported a mixed quarter, with weakness in YouTube’s advertising business in particular. But there’s nothing wrong with the Google Cloud business, which grew 44%, and is nearing a $ 25 billion run rate. The strong results from both bode well for Amazon (AMZN), which will report March quarter results after the market closes Thursday.
Microsoft’s guidance for the June quarter was above previous Street estimates for its cloud and applications business, but softer-than-expected for the “More Personal Computing” segment, specifically reflecting manufacturing shutdowns in China, which the company sees impacting both Xbox and Surface hardware sales, as well as Windows revenue tied to PC makers. The Street is largely shrugging off that factor, though, and focusing instead on the strong cloud performance.Write to Eric J. Savitz at firstname.lastname@example.org
Citi’s Tyler Radke, who repeated his Buy rating and upped his target on the stock to $ 364, from $ 355, gushed over the strong results. “Up against squeamish software sentiment, Microsoft delivered a resounding Q3 with a clean beat across key revenue categories… and provided a reassuring outlook,” he wrote in a research note.
Radke was especially impressed by the strong bookings in the quarter, which he thinks should “challenge the prevailing narrative that software fundamentals are weakening across the board.” Radke thinks the results are positive for other software companies with cloud-based models, calling out in particular
(DDOG) as potential winners.
Piper Sandler analyst Brent Bracelin makes a similar point, writing in a research note Wednesday that “cloud demand remains one of the few bright spots in early 2022 against a backdrop of intensifying global risk factors.”
Bracelin adds that better-than-expected results from the Microsoft and Google cloud businesses “give us confidence that investor fears of a potential cloud slowdown induced by a pandemic hangover and tightening economic conditions has proven to be an overly negative narrative so far.”
With the 100 largest cloud stocks down 41% on average since Nov. 1, Bracelin says, any further evidence of cloud industry resilience could calm investor fears — and potentially boost cloud stocks. He thinks cloud software revenue could triple to more than $ 1 trillion by the end of the decade. Writes Bracelin: “The best days of cloud might still lie ahead.”
Evercore ISI analyst Kirk Materne makes a similar point in his own review of the quarter — the cloud story is here to stay. “Microsoft’s results and guidance are a helpful reminder that the secular trends powering cloud demand and digitization remain intact and for those taking a three- to six-month view, we believe Microsoft and other leading enterprise software stocks offer attractive risk / reward opportunities at current levels, ”Materne writes.
Wedbush analyst Dan Ives thinks the Microsoft quarter could prove to be a pivotal moment for tech stocks following a long slide that started last fall. He writs in a research note that said the company delivered “cloud guidance for the ages,” providing a positive data point for the entire tech sector. “The Fed raising rates and inflation issues will slow down the economy, but we view cloud spending as deflationary and ultimately on an accelerated path with Redmond leading the way,” he writes. “We would characterize this as a blowout.”
Microsoft shares have rallied 5.2% on the earnings report, while Alphanet is off 3.8%. Amazon is down 0.6%.
Write to Eric J. Savitz at email@example.com