Microsoft 'is driven by the cloud' and has more room to run, analyst says

Vontobel Senior Research Analyst Peter Choi joins Yahoo Finance Live to survey Microsoft's 12 months of successful growth and how its footholds in the cloud computing space may contribute to success over competitors.

Video transcript

AKIKO FUJITA: Welcome back to Yahoo Finance Live. We are seeing shares of Microsoft up just slightly in the session. It is our company of the year for Yahoo Finance, partly because of the incredible growth that we have seen from the tech name. Microsoft, as you'll recall, briefly dethroned Apple as the most valuable company of-- or most valuable company in the world, passing the $2 trillion market cap earlier this year.

Let's bring in Peter Choi. He is Vontobel Quality Growth senior research analyst. We've also got Dan Howley joining in on the conversation. Peter, it's good to talk to you today. You know, we were talking-- I was talking to Dan earlier about how it feels like, you know, all the pieces have come together for Microsoft over the last year, really. How much of this momentum do you think they can keep going?

PETER CHOI: Yeah, I mean, it's certainly been a tremendous run for the company. And particularly in the past two years, there were some accelerants, such as COVID and work from home, or now it's distributed learning, that really drove home the value of cloud computing. But ultimately, this is really more of a secular trend.

We really view the shift to cloud computing as a generational shift in infrastructure technology, the kind of swing you saw when the mainframe was introduced or when PC desktops were introduced. So this is certainly a trend that is going to have a lot of legs. And when you look at Microsoft itself, obviously, it's driven by the cloud. And they've really established a unique pole position for themselves. Obviously, with Azure, they've really become a co-leader, along with Amazon, in terms of offering public cloud.

But if you look at their, I guess, you could call almost legacy business, they have a wealth of relationships with large enterprise customers that already existed and really a portfolio of products that span things that help data centers run, as well as in addition to business applications, such as office dynamics and all that goodness. And this has really all come together to make Microsoft a natural partner for companies that are looking to transition. And this is something we think is going to happen for some time.

DAN HOWLEY: Peter, this is Dan. I want to ask about that future outlook for Microsoft. What does the next year and the next two years look like as far as growth? Can they continue this rapid pace?

PETER CHOI: Yeah, I mean, I think if you look at the past year or two, growth has certainly been very heady. And it may be aggressive to assume they can continue to grow at a high teens or even 20% rate. At the same time, that's OK. Microsoft is a company that, at this point, is doing $200 billion in run rate revenues. I don't think people have expectations that they can maintain this level. If they can continue to grow at a mid to high teens and maybe slowly graduate to low teens, that's certainly OK.

And really, that's also reflected in the company's valuation. This has not really been a hyper growth company, where people are trading at 20 or 30 times revenues. We think this is a company where the valuation and growth rate, you know, leave room for the stock to further appreciate.

DAN HOWLEY: I want to talk about the cloud business that it has there. Obviously, that's been the star of the show for Microsoft. What's the outlook there? And how much penetration do they have in the cloud industry, not necessarily as far as market value, but as far as the customers that they already have, whether they're looking at on-premise or off-premise cloud?

PETER CHOI: Yeah, I mean, precise numbers are sometimes hard to get, depending on what sources you look at. I mean, I think I've seen estimates for existing cloud penetration to be in a range of-- I don't know-- anywhere from 20% to 25%, maybe even a little higher. Ultimately, you know, that alone allows you to be still in pretty early innings.

The other thing I would really emphasize is just the fact that you shift to cloud and you can really abstract away the whole idea of a data center, and with a stop of your finger, essentially spin up or down immense amounts of computing power and capability, that also really unlocks a lot of net new use cases, stuff that you wouldn't have even thought to accomplish if you had to maintain your own physical infrastructure. And so we really think, you know, this is going to unleash new applications or new use cases. So there are multiple legs of growth still remaining.

AKIKO FUJITA: Peter, what do you think is the biggest risk that could derail the momentum we've seen from Microsoft? And coupled with that, who poses the biggest threat in terms of their competitors?

PETER CHOI: Yeah, I mean, you know, Microsoft certainly competes in a lot of large markets. And they are bumping against other major competitors. Obviously, within public cloud itself, AWS is still the original gorilla in that space. I think what we would say there is, really, it's a large market. And if you really want businesses to trust their computing infrastructure over to third parties, it's actually healthy to have more than one monopolistic company out there because otherwise, you're just not going to have the same level of trust in terms of outsourcing.

Certainly, in the business application space, as companies start going a little more horizontal, you're going to run into companies there. But I think ultimately, what we see is, you know, these are still large and growing markets. And there's still room for people to expand. And Microsoft, really with an anchor position in terms of a portfolio of productivity applications for white collar workers, that that's a great landing place, along with everything else they bring to the table.

DAN HOWLEY: Peter, just as a final question, obviously, we find Microsoft growth to be truly impressive. Obviously, we wouldn't give it company of the year. But I want to get your thoughts on their growth and how you think they've done over the past year, not just necessarily the past year, but, you know, over the 10 years of Satya Nadella so far. What kind of main differences have you seen? And how do you see that growth compared to other companies of its size?

PETER CHOI: Yeah, I think that's a great point. I mean, certainly relative to the size of the company, this has been close to unprecedented, I would think, and really reflects, right, the large nature of the markets they're in and the fact that a lot of these are going digital at the same time. Also, really, it's a good opportunity to just sort of acknowledge the job that Satya did. You know, with all the success Microsoft has had, it's almost tempting to think or fool yourself into thinking, you know, this kind of success was preordained.

And that was certainly anything about the case. When Nadella came on as CEO, really, he inherited a company that was very much at the crossroads. It was still very inwardly looking and really seeking to protect the leadership of its Windows franchise, which, at that time, was starting to lose relevance. What Nadella really did was reorient the company's North Star, if you will.

And really, he specifically changed the mission statement to saying, you know, it's no longer about putting a PC on every desk. It's about aligning ourselves with our customers. And our ultimate mission is to help every person and every organization accomplish more and do it better. And really, that was a very fundamental rethinking of what the company was about.

And he also spent a lot of time talking about the need to reinvent a culture also, converting it more from what has historically been a know-it-all type of organization, which reflected the fact that they were the preeminent technology firm at one point, and shifting more toward what he called a learn-it-all organization or a growth mindset, where people could be more collaborative, a company that wasn't prone to not invented here syndrome, and really invigorating itself along, how it can be more helpful to its clients and underline itself that way. And these were pretty bold and courageous things to do at that time. And he certainly deserves all the credit he gets there.

AKIKO FUJITA: Yeah, we have certainly seen a significant cultural shift, it feels like, within the company as well. Peter Choi, it's good to talk to you today, Vontobel Quality Growth senior research analyst. And our thanks to Yahoo Finance's Dan Howley for joining in on the conversa--