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Is The Cloud Space Headed To The Stratosphere?

Daniel Laboe

Cloud computing is a buzz word that has investors in a buying frenzy. Microsoft MSFT is the most recent cloud player to release June quarter earnings and the beat on top and bottom-lines has thrust MSFT to all-time highs. This is the 9 th straight quarter of double-digit year-over-year revenue growth, and its cloud segment growth is propelling valuations to strong growth levels. MSFT is up to $138.70, 35% returns for the year thus far and some analysts are estimating that it could hit $150 by the end this year.

Microsoft Corporation Price and Consensus

Microsoft Corporation Price and Consensus

Microsoft Corporation price-consensus-chart | Microsoft Corporation Quote

The Cloud Space

The cloud industry is saturating at a prolific rate with each competing firm attempting to find their niche in the space. Players like Salesforce CRM the leading customer-relationship management firm. Oracle ORCL provides a wide range of cloud-based enterprise solution focused on database and software-as-a-service (DaaS and SaaS). Firms like Cisco CSCO with multi-cloud solution platform are forced to integrate with the most prominent players in the game including Microsoft’s Azure, Amazon’s AWS AMZN, and the Google Cloud GOOGL.

Currently, Amazon’s AWS is the biggest player in the cloud computing category. Surprisingly, its cloud segment is driving more than 50% of this almost trillion-dollar retail company’s profits. AWS has been expanding at a rate north of 30% for the past decade, but Microsoft’s Azure has been quickly catching up.

Microsoft Azure has been posting triple-digit to high double-digit growth figures and expected to be the driving force of the firm moving forward.

The biggest concern in this space is the ability to turn robust margins when the competition is so steep. As more and more firms enter the cloud segment, price competition will begin pinching margins, and only the most scaled platforms will remain. So it is pertinent that these top players expand and solidify their market share positions before the full saturation for the industry is reached.

Sell-side analysts having been raising EPS estimates for top cloud firms over the last few months on bullish sentiment pushing ORCL, CSCO, MSFT, and AMZN into Zacks Rank #1 – 2 (Strong Buy – Buy).

Take Away

Microsoft’s strong Q2 earnings, propelled by its cloud segment, is a very positive signal to the rest of the cloud space. It illustrates that demand for cloud technology is still strong. Valuations continue to rise for these firms as cloud demand is further validated.

I would recommend adding one of these cloud players into your portfolio but waiting for a dip in the sector wouldn’t be a bad idea considering that most of these are trading on or close to their all-time highs.

 

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