Microsoft Azure, the software giant's public cloud business, continues to generate outsized growth, gradually eating into the big market share edge held by market leader Amazon Web Services. And at least one Wall Street analyst thinks his peers are under-estimating Azure's potential.
In a 67-page research report published on Thursday, Credit Suisse analyst Phil Winslow laid out in detail why he thinks Microsoft (ticker: MSFT) can grow Azure "faster and bigger" than what Wall Street expects. Winslow sees a shift unfolding in the way businesses are using the cloud that plays to Microsoft's strengths.
In the March quarter, AWS had revenue of $18.4 billion, up 37% from a year ago, while Microsoft had $11.3 billion in revenue, up 46%. Amazon.com $(AMZN)$ is bigger, but Azure is growing faster. Winslow thinks the trend will continue.
Following the Great Recession more than a decade ago, the analyst noted, the focus among IT buyers was on shifting applications to the cloud, with the widespread adoption of subscription-based software-as-a-service models, often hosted on AWS.
Now, Winslow said, companies are "moving forward on multi-year strategic cloud-first transformation," a jargony way of saying they are making wholesale changes in the way they structure their IT infrastructure, not just shifting specific applications to the cloud.
He added that the pandemic "exposed the shortcomings" of relying on legacy on-premises applications and IT operations, strengthening the case for cloud computing. Winslow thinks overall public cloud spending will surpass on-premises IT spending by 2024, excluding PCs, tablets, printers and IT services.
The analyst believes Azure will disproportionately benefit from this shift, and will "continue to narrow the revenue gap" with AWS, while widening the gap ahead of Alphabet's $(GOOGL)$ Google Cloud, the distant No. 3 player in terms of market share.
Winslow said he thinks Azure will "drive sustained growth for Microsoft and meaningful upside to consensus estimates." His view is that enterprise customers that already have large investments in Microsoft technology in their own data centers are likely to choose Azure as a strategic cloud provider.
The Credit Suisse analyst conceded that Wall Street already is "largely positive" about the outlook for Microsoft, but contends that the full-year impact of Azure's growth opportunity is not properly reflected in Wall Street models. He noted that Azure has been faster than AWS to reach major revenue run-rate milestones -- faster to $500 million, to $1 billion, to $5 billion, and so on. But he said that consensus forecasts from here -- with Azure now on an estimated $10.5 billion run-rate -- look overly conservative.
Wall Street, he said, sees Azure's growth rate gradually slowing from the 46% rate reported in the March quarter, to under 30% by the fiscal fourth quarter ending in June 2025. But Winslow sees much more robust growth, with a compounded rate of nearly 41% through 2025.
Winslow's bullish view on Azure supports his thesis that Microsoft can post mid-to-high teens revenue growth for at least the next five years, with earnings and free cash flow per share growing in the high-teens to 20% range, aided by increasing scale and continued share repurchases.
Concluded Winslow: "We believe these levels of sustained growth and profitability are still not properly reflected in consensus estimates or valuation."
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