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Microsoft Azure, a giant of public cloud enterprise software, continues to generate excess growth and is gradually gaining the lead in market share from market leader Amazon Web Services. And at least one Wall Street analyst thinks his peers are underestimating Azure’s potential.
In a 67-page research report published Thursday, Credit Suisse analyst Phil Winslow detailed why he believes Microsoft (Ticker: MSFT) can grow Azure “faster and bigger” than Wall Street expected. Winslow sees a shift in how businesses use the cloud, which adds to Microsoft’s strengths.
In the March quarter, AWS had revenue of $18.4 billion, up 37% from a year ago, while Microsoft had revenue of $11.3 billion, up 46%. Amazon.com (AMZN) is bigger, but Azure is growing faster. Winslow believes the trend will continue.
The analyst noted that after the Great Recession more than a decade ago, IT buyers focused on moving applications to the cloud, with software models becoming widespread as subscription-based services, often hosted on AWS.
Now, according to Winslow, “enterprises are moving forward in a multi-year strategic cloud-first transformation,” which in jargon means they’re making big changes to the way they structure their IT infrastructure, not just specific applications in it move to the cloud.
He added that the pandemic has “uncovered shortcomings” when it comes to relying on legacy on-premises applications and IT operations, strengthening the case for cloud computing. Winslow believes that by 2024, total public cloud spending will exceed on-premises IT spending, excluding computers, tablets, printers, and IT services.
The analyst believes Azure will benefit disproportionately from the move and will “continue to narrow the revenue gap” with AWS, widening the gap ahead of Google Cloud Alphabet (GOOGL), the #3 remote player in terms of market share. .
Winslow said he thinks Azure “would lead to Microsoft’s continued growth and a significant increase in consensus estimates.” He believes enterprise customers who already have large investments in Microsoft technology in their own data centers are likely to choose Azure as their strategic cloud provider.
Analyst Credit Suisse acknowledged that Wall Street was already “very positive” on Microsoft’s prospects, but said the full-year impact of Azure’s growth opportunity was not properly reflected in Wall Street’s models. He found that Azure was hitting key revenue milestones faster than AWS — faster at $500 million, $1 billion, $5 billion, and so on. However, he said the consensus forecasts from here — with Azure now at an estimated operational speed of $10.5 billion — look overly conservative.
Wall Street, he said, sees Azure’s growth rate gradually going from 46% in the March quarter to less than 30% in the fourth fiscal quarter ending in June 2025. But Winslow sees much more robust growth, with an overall rate of nearly 41% through the end of 2025.
Winslow’s optimistic view of Azure supports his thesis that Microsoft will see teen revenue growth for at least the next five years, with earnings and free cash flow per share rising by up to 20%, supported by larger scale and continued share buybacks .
Winslow concludes, “We believe these levels of sustainable growth and profitability are still not adequately reflected in consensus estimates or valuations.”
Sign to Eric J. Savitz [email protected]