Microsoft Corp. (MSFT) may have been late to the cloud web hosting party, but it’s been growing the business at a fast clip, which prompted Pacific Crest Securities to downgrade its investment rating on cloud hosting competitor Amazon.com Inc. (AMZN) last week.
Last week, Pacific Crest analyst Brent Bracelin lowered his price target on Amazon to $895 from $905 a share largely because Amazon Web Services (AWS) is facing real competition from the likes of Microsoft and Alphabet Inc.’s Google (GOOG) in the cloud hosting market. The analyst pointed to the fact that both Microsoft and Google have made major drives to land startups and Fortune 500 companies and those efforts are paying off.
"AWS boasts a multiyear lead over Microsoft Azure and Google Cloud. However, heavy investments could increase the viability of these alternatives,” wrote Bracelin in a research noted covered by Fortune. “After three years of outsized gains and a tripling of profits, AWS' growth could moderate this year and next.” The analyst noted the cloud computing business is still in its infancy but is expected to grow in the years to come. Bracelin estimates that of the total $1.3 trillion spent on information technology around $60 billion is earmarked for the cloud. That leaves a lot of opportunity for AWS, Microsoft and Google to grab more share.
Microsoft’s Cloud Business Booming
For Microsoft, the cloud hosting business has been a good one for the software giant in recent months. When Microsoft reported second-quarter earnings results in late January, it posted a nearly 4% increase in profits thanks to the fast-growing cloud computing business. During the fiscal second quarter, Azure revenue surged 93% year over year (up 95% in constant currency). While Microsoft doesn’t break out how much money it makes in that business, some Wall Street analysts believe Microsoft’s Azure cloud generated revenue of $3 billion in the most recent quarter. (See also: Microsoft's Azure Cloud Revenue Estimated at $3B.)
Microsoft is taking steps to expand its cloud hosting business and, at the same time, lower the cost. Earlier this month it announced it had created a Windows Operating System for servers that runs on ARM processors instead of Intel Corp. (INTC). Microsoft is also embracing an open-source design for its cloud servers dubbed Project Olympus. The move to embrace ARM processors and an open-source design for cloud servers is aimed at lowering its costs by embracing new hardware and becoming more flexible so that it can stay on the same competitive footing with Amazon and Google in the cloud server market.