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When Satya Nadella became Microsoft’s third CEO (MSFT -0. 74%) in 2014, he promised the aging tech giant to become a “mobile-first, cloud-first” company. This ambitious strategy boosted the company’s annual earnings at a compound annual expansion rate (CAGR) of 10% between fiscal 2014 and fiscal 2023 (which ended last June), while its consistent earnings with consistent percentages (EPS) grew at a CAGR of 16%. It has also bought back about 10% of its consistent percentages for more than 10 years.
During this golden decade, Microsoft’s stock rose by approximately 890%, making it the second most valuable company in the world with a market capitalization of $3. 3 trillion. Much of this expansion has been driven through Azure, which has one of the three dominant leaders in the burgeoning cloud computing market.
Here’s a new look at Azure, how fast it’s growing, and why it will likely remain Microsoft’s core business for the foreseeable future.
Microsoft introduced Azure in 2008 to supply cloud-based infrastructure as a service (IaaS) and platform as a service (PaaS) equipment to giant enterprises. Instead of installing more on-premises servers, which are expensive, energy-intensive, take up valuable space, and require constant maintenance, corporations can simply outsource this computing and garage power to Azure as usage-based services or by subscription.
In the past, Satya Nadella led Microsoft’s enterprise and cloud organization before becoming CEO. Identified the prospects for expansion of the Azure cloud platform. But when he took over, Azure was still much smaller than Amazon Web Services (AWS), which had already earned the merit of being the first to act in the market.
To close this gap, Microsoft has been investing aggressively in Azure, although this strategy has temporarily reduced its operating margins. It expanded its ecosystem with more equipment, relying on primary stores such as Walmart and Target (which competed directly with Amazon). and invested in OpenAI to integrate the startup’s generative synthetic intelligence (AI) team into its own cloud services.
Azure has supported Microsoft’s transformation of its Office and Dynamics desktop programs into cloud-based software-as-a-service (SaaS) programs. The move prompted the company to launch mobile versions of its flagship apps for iOS and Android devices, pairing its Windows operating formula with more cloud-based services and launching cloud-based gaming platforms for its Xbox consoles.
In 2015, Microsoft set an ambitious goal: to increase its annual cloud profits from $6. 3 billion to $20 billion through fiscal 2018. It surpassed that goal earlier than expected in fiscal 2017, and that number rose to $110 billion (52% of its overall profit) in fiscal 2023. More than some of its overall cloud profit came from Azure that year.
According to Synergy Research, Azure’s share of the global cloud infrastructure market grew from 14% to 26% between the fourth quarters of calendar 2017 and 2023. During that same period, AWS’ share dipped from 32% to 31%, while Alphabet’s Google Cloud grew its share from 8% to 10%.
These numbers suggest that Azure and Google Cloud could reduce AWS’s dominant market share, but they also divert many businesses from smaller competitors that don’t have the time to keep up with the three cloud leaders.
Microsoft reveals its precise cash revenue or operating profit figures for Azure’s cloud infrastructure business. Instead, it only publishes the year-over-year expansion rate of its “Azure and other cloud services” segment on a quarterly basis.
This segment grew more than 60% during the peak of fiscal 2020, but has calmed down to the low 20s and low 30s over the following year. This slowdown is not surprising, as macroeconomic headwinds have caused many corporations to restrict their cloud spending; However, Azure’s earnings expansion has accelerated over the past three quarters.
Metric
Third quarter of 2023
Fourth quarter of 2023
First quarter of 2024
Second quarter of 2024
Third quarter of 2024
Azure and other cloud revenue expansion (year over year)
27%
26%
29%
30%
31%
This acceleration can be attributed to increased AI workloads, which are pushing more corporations to expand their cloud infrastructure services, and the integration of OpenAI’s generative AI team into its own cloud-based services.
Analysts expect Microsoft’s earnings and EPS to grow at a CAGR of 15% and 17%, respectively, between fiscal 2023 and fiscal 2026. Its inventory is unreasonable with 33 times next year’s earnings, yet its scale and diversification justify the superior valuation. It remains a simple inventory to present to those who need greater exposure to the developing cloud, AI, and gaming markets.
Suzanne Frey, an employee of Alphabet, is a member of the board of directors of The Motley Fool. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Amazon. The Motley Fool holds positions and recommends Alphabet, Amazon, Microsoft, Target and Walmart. The Motley Fool recommends the following options: $395 January 2026 long calls at Microsoft and $405 January 2026 short calls at Microsoft. The Motley Fool has a disclosure policy.
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