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Microsoft's Nadella Delivers While Bezos Disappoints

01/29/2016 9:05 am EST


Michael Berger

President & Founder,

While he does not expect Azure to overtake Amazon Web Services, Michael Berger, of does see it as an alternative solution and outlines the reasons for why he continues to view Microsoft as an attractive investment.

After the market closed Thursday, Microsoft Corp (MSFT) and, Inc. (AMZN) reported earnings. MSFT reported better than expected numbers, while AMZN missed analyst expectations.

MSFT is trading higher Friday morning after reporting $0.78 in adjusted earnings per share on $25.69 billion in revenue. Analysts expected MSFT to report $0.71 in adjusted earnings per share on $25.26 billion in revenue (according to Thomson Reuters). During the quarter, MSFT returned $6.5 billion to shareholders through share repurchases and dividends.

AMZN has fallen more than 10% in pre-market trading after falling short of consensus earnings and revenue expectations. AMZN reported earnings of $1.03 per share (expected $1.56 per share) on $35.7 billion in revenue (expected $35.93 billion).

AMZN has seen its business transform over the last few years due to its Amazon Web Services business. During the quarter, Amazon Web Services generated $2.4 billion in revenue. Amazon Web Services is the leader in the cloud space, but MSFT will likely emerge as one of the few hyper scale cloud vendors due to its Azure platform.

The Fight for the Cloud

During the quarter, MSFT's Intelligent Cloud segment generated $6.34 billion in revenue which was slightly higher than the $6.29 billion estimate. Within that category, revenue from its Azure business increased by 140% (on a constant currency basis). MSFT said that more than one-third of all Fortune 500 companies are using Microsoft's Enterprise Mobility solutions.

After the earnings announcement, Microsoft CEO Satya Nadella said, “Businesses everywhere are using the Microsoft Cloud as their digital platform to drive their ambitious transformation agendas. Businesses are also piloting Windows 10, which will drive deployments beyond 200 million active devices.”

The company has a goal of 1 billion active devices on the operating system. We believe that CEO Nadella's aggressively open strategy toward non-Microsoft platforms will make Azure a dominant player in Platform-as-a-service (PaaS), as well as in Infrastructure-as-a-Service (IaaS). While we do not expect Azure to overtake Amazon Web Services, we continue to view it as an alternative solution. We expect to see MSFT close the current features gap through the addition of key features that have a strong set of offerings and could rival Amazon Web Services.

Outlook Is Bright for Microsoft

The future is bright for MSFT and we continue to view the company as an attractive investment. Going forward, we expect to see MSFT report better than expected earnings in the March and June quarters now that the headwinds associated with the move from XP to Windows 7 are behind them. The easy comparables from the March and June quarters during 2015 will serve as a catalyst for MSFT.

Following the earnings release, MSFT has seen its price target increase by firms like Piper Jaffray (PJC), Credit Suisse Group (CS), Citigroup, Inc. (C), Jefferies Group, and Wunderlich.

Michael Berger, Founder and President,

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