Cloud Could Add $15 Billion to Microsoft Corporation (MSFT) Profits
After a lost decade following the bursting of the dot-com bubble, Microsoft Corporation (Nasdaq: MSFT) has once again found its stride thanks to its booming cloud services business. Analysts now say years of heavy investments have Microsoft in the early stages of a long-term cloud growth story that will jump-start earnings, revenue and MSFT stock.
According to Bank of America analyst Kash Rangan, Microsoft's commercial cloud gross margins should expand from about 55 percent to at least 65 percent in coming years, generating tremendous cash flow for the company.
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"Our long-term thesis is that the cloud business has an incremental tailwind of $10 billion to $15 billion in gross profits over the next three years," Rangan says.
He estimates that every additional $1 billion in gross profits will add 10 cents to Microsoft's earnings per share. Bank of America estimates Microsoft's cloud business could ultimately have a total addressable market of $50 billion. Assuming a 60 percent long-term gross margin, Rangan says Microsoft could add between $3 and $4 in EPS by 2025 from its cloud business alone.
"MSFT is a consensus long and, in our view, can earn $8 in EPS by 2025 driven by commercial cloud," Rangan says.
GBH Insights head of technology research Daniel Ives says Amazon.com ( AMZN) will likely continue to dominate cloud services market share in 2018, but Microsoft's sales team and long-standing enterprise partnerships make it well-positioned to take advantage of the massive shift to public cloud storage. Amazon Web Services currently operates at a $20 billion annual revenue run rate, roughly three times the $6.9 billion run rate of Microsoft Azure. However, AWS revenue is growing at around 45 percent annually, while Azure's revenue growth rate is 98 percent.
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"Microsoft continues to be one of GBH's top tech picks given its Azure cloud momentum, Office 365 transition on consumer/enterprise, and newer integrated product initiatives around consumers (LinkedIn), that are still in the early days of playing out within Redmond's ubiquitous installed base of consumers and enterprises worldwide," Ives says.
GBH Insights has a "highly attractive" rating and $95 price target for Microsoft. Bank of America has a "buy" rating and $106 target for MSFT stock.
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