Microsoft Azure is ‘gaining some ground on Amazon,’ strategist says

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

Video transcript

ADAM SHAPIRO: We're going to keep talking about this Microsoft earnings report because not only did Microsoft close down before they reported it at 4 o'clock, 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 into something because-- and you made us-- you made me look a lot smarter than I am with our previous guests because I was using the notes you sent us when I asked them a question about Azure growth and cloud growth and trying to understand why investors might be saying, oh, I'm going to take a little profit from Microsoft today.

Is the pace at which Azure may be growing-- I think they said year over year, it was 46%, the revenue growth-- is that sufficient to help them catch up with what we're seeing, you know, with Amazon's cloud growth? Or is there something else that might be upsetting investors?

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

And, you know, to be quite honest with you, Adam, if you look at Azure, it's actually growing faster than AWS. AWS is growing between 30% to 35%, and Azure is growing between, let's say, 46% to 50%. So they are seemingly gaining some ground on Amazon. It'll be interesting to see how long it takes for them to catch up. But they are doing a very good job. Office 365, which is their software as a Service entry, is doing extremely well also. So they're kind of a one, two punch between data center and software as a service. So you think of AWS as strictly a data center play.

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

EMILY MCCORMICK: Dan, I want to ask about Microsoft's, of course, acquisition, $69 billion of Activision Blizzard. Now, of course, that isn't set to close until fiscal 2023, so we aren't seeing any impact from that in these results. But when you think about the future of Microsoft, do you think this is something that's going to complement Azure and its existing cloud computing platforms? Or is it going to signal to investors that the company is perhaps going in a little bit of a different direction for growth?

DAN MORGAN: Well, 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 computing group, which has Xbox in it, because they have something called Game Pass, which you guys probably talked about before. It's kind of like a Netflix subscription revenue where you can subscribe to games. And I think that's where they're really going to get the boost. They also talked in the conference call, if you had an opportunity to see the notes, about Metaverse and what it could be done in there in terms of gaming.

I don't look at it as much as a complementary to the Intelligent Cloud group, which is where Azure is. But I look at it more in terms of boosting growth in terms of the more personal computing segment, which is a little bit downtrodden right now, just because we've seen a big drop-off in terms of demand for PCs and laptops, although when you guys read the numbers, they actually beat on their more personal computing group in terms of expectations. But the growth has definitely been slowing down in that segment since we had the big back to-- work from home initiative has kind of been slowing down.

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

DAN MORGAN: Well, you bring up a good point, Adam, and that is that, you know, Xbox and Sony-- they're the two big console makers-- Microsoft obviously a big player in the group. If we push out a year from now, this deal goes through, you have some 300 games that are going to potentially be added. So you could see a big push where they really tie in the Xbox to the Game Pass, which is just a subscription revenue program, charge you $10, $15 a month. You have unlimited access to all these games. So they're trying to tap into that reoccurring revenue model.

Right now, it doesn't generate a huge amount of money. But when you start to put the Xbox as your hardware, along with the Activision as your content, all of a sudden, you've got a dual force together that they can really market. So it's really an extension to what they're already doing with Xbox and some other things, but it is a new caveat and direction for them because we don't think of Microsoft, other than LinkedIn, as being a reoccurring revenue subscriber story. We think of them more as a cloud story, as an enterprise software play, right? So it's a little bit different for them.

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

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

But I think going forward, Emily, the future obviously, they want to develop organically, but they want to make strategic acquisitions that add legs of growth to their different franchises. And I would expect them to continue to do that. You mentioned earlier that they, what, $10 billion they did in form of dividend and stock repurchase on this quarter. So they still have a lot of money that they could use to continue to do complementive acquisitions. So I would expect that a big part of their growth plan going forward.

ADAM SHAPIRO: Dan, you've been very helpful. And please consider this the invitation to come back definitely--

DAN MORGAN: Thank you.

ADAM SHAPIRO: --when the next earnings report for Microsoft. Dan Morgan is a Synovus senior portfolio manager. All the best to you--