Microsoft Azure gains ground on Amazon, says strategist

Synovus Senior Portfolio Manager Dan Morgan joins Yahoo Finance to discuss Microsoft earnings.

Video transcription

ADAM SHAPIRO: We keep talking about this Microsoft earnings report because not only did Microsoft shut its doors before reporting it at 4 a.m., we’re seeing a bit of a sell-off after hours. And it’s not dramatic, but it’s enough to make you go, hmm. I mean, they beat in so many ways in this report, revenue, $51 plus billion.

Dan Morgan is the senior portfolio manager at Synovus. And Dan, want to jump in on something because – and you made us – you made me look a lot smarter than I am with our previous guests, because I used the notes you sent us when I asked them a question about Azure- growth and cloud growth and trying to understand why investors might say, oh, I’m going to take some profit from Microsoft today.

Is the rate at which Azure might be growing — I think they said year over year it was 46%, revenue growth — is that enough to help them keep up with what we’re seeing, you know, with Amazon’s cloud growth? Or is there something else that might upset investors?

DAN MORGAN: Well, Adam, I mean, the number was right, like you said, 46%. You have to take into account the first quarter of 2022, they did about 50% growth in Azure. If you go back and look at the market share data, AWS, which of course is Amazon, is about 32%, 33% of the market share in the data center space. And then Azure is about 20%. So you’re asking a good question, which is how long will it take once you cut that amount to actually catch up with AWS?

And to be fair, Adam, if you look at Azure, it’s actually growing faster than AWS. AWS is growing between 30% and 35% and Azure is growing between, say, 46% to 50%. So they seem to be gaining some ground on Amazon. It will be interesting to see how long it takes for them to recover. But they do a very good job. Office 365, their software-as-a-service item, is also doing extremely well. So they’re sort of a one-two punch between data center and software as a service. So you think of AWS as strictly a data center game.

But you bring up a good point, which is, how long does it take for them to catch up? And they are making great strides in terms of new victories. So I would expect Microsoft and, really, Amazon to be the two leaders in that group right now.

EMILY MCCORMICK: Then, of course I want to ask about Microsoft’s $69 billion acquisition of Activision Blizzard. Of course, that won’t close until fiscal year 2023, so we don’t see any impact of that in these results. But when you think about the future of Microsoft, do you think this is something that will complement Azure and its existing cloud computing platforms? Or is it going to signal investors that the company might be moving in a bit of a different growth direction?

DAN MORGAN: That’s a good question, Emily. I mean, when I saw the deal, I thought it was a good deal. I think it’s more complementary to their more personal computer group, which Xbox is in, because they have something called Game Pass, which you probably talked about before. It’s a kind of Netflix subscription revenue where you can subscribe to games. And I think they’re really going to get the boost there. They also spoke on the conference call, if you had a chance to see the notes, about Metaverse and what it could be doing there in terms of gaming.

I don’t see it so much as an addition to the Intelligent Cloud group, where Azure is. But I’m looking at it more in terms of driving growth in terms of the more personal computing segment, which is a bit suppressed at the moment just because we’ve seen a big drop in terms of demand for PCs and laptops, although if you read the numbers , they beat their more personal computer group in terms of expectations. But growth is definitely slowing down in that segment since we had the big back to work from home initiative has slowed down a bit.

ADAM SHAPIRO: You know, it’s helpful to have an expert like you to put this into context because when you come up with what Emily asked about the Activision Blizzard deal, and that’s still not going to pass for another what, year. But you have Xbox. They talked about Xbox content services revenue up 10%. Put that into context for people what that means today, but what that could mean, you know, what kind of growth we would expect once this is all processed in a year and a half.

DAN MORGAN: Well, you bring up a good point, Adam, which is that, you know, Xbox and Sony – they’re the two big console makers – Microsoft is clearly a big player in the group. If we go through in a year this deal goes through, you’ll have about 300 games that may be added. So you could see a big push where they actually connect the Xbox to the Game Pass, which is just a subscription revenue program, charging you $10, $15 a month. You have unlimited access to all these games. So they try to take advantage of that recurring revenue model.

It’s not making much money at the moment. But when you start using the Xbox as your hardware, along with the Activision as your content, you suddenly have a double power that they can really bring to market. So it’s really an extension of what they’re already doing with Xbox and some other stuff, but it’s a new warning and direction for them because we don’t see Microsoft, other than LinkedIn, as a recurring revenue subscriber story. We see them more as a cloud story, as a game with enterprise software, right? So for them it’s a little different.

EMILY MCCORMICK: For the next year, maybe a few years, for Microsoft, do you see most of its growth coming organically? Or are you starting to see more acquisitions coming in and more growth through that channel, especially given the cash pile right now?

DAN MORGAN: Well, Emily, it’s interesting. They had $130 billion in cash on their balance sheets at the end of last year. Of course they do this deal with Activision. It’s, what, $75 billion, which is a huge deal for them. I would expect them to continue to take over companies. I mean, I always thought Microsoft would take out some of these cloud companies. I always thought they would have an open season and build some kind of market share, as Adam said, to AWS, with Amazon, or add more to the software as a service.

But I think in the future, in the future, of course, they want to develop organically, but they want to make strategic acquisitions that add growth potential to their various franchises. And I would expect them to continue to do so. You said earlier that they did, what, $10 billion they did this quarter in the form of dividends and share buybacks. So they still have a lot of money that they can use to continue making complementary acquisitions. So I would expect that a big part of their growth plan will be in the future.

ADAM SHAPIRO: Dan, you’ve been very helpful. And please consider this an invitation to come back for sure…

DAN MORGAN: Thank you.

ADAM SHAPIRO: –when the next earnings report for Microsoft. Dan Morgan is senior portfolio manager of Synovus. Best for You–

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