Microsoft's story continues to be cloud: Analyst

Yahoo Finance’s Brian Sozzi, Brian Cheung, and Julie Hyman break down Microsoft's latest earnings report with Brent Bracelin, Piper Sandler Senior Research Analyst.

Video transcript

- Microsoft is the top trending ticker on the Yahoo Finance platform right now after its earnings last night, which sure makes sense to me and clearly a lot of other folks. The company pummeled analysts' profit estimates on the back of strength in teams and cloud services. Microsoft's revenue outlook was also rather upbeat. Brent Bracelin is an analyst at Piper Sandler and covers Microsoft and is here with us now. Brent, thanks for taking some time on a busy earnings season morning. I want to lock in on Azure, their cloud services business. Sales up 48%. Accelerated compared to the 45% growth rate in the prior quarter. Is Microsoft gaining market share from AWS?

BRENT BRACELIN: Listen, I think they're gaining share from on prem. If you think about the cloud market, about 13% of the overall cloud industry has kind of transitioned to cloud. So they're not necessarily taking share from AWS. It's Azure AWS basically taking share from the traditional on prem vendors. But, absolutely, Microsoft put up, what, 22% growth. That's the highest in seven years. Profits are at a 10-year high. All of that is driven by their cloud business, Azure being kind of the primary growth engine. And it's now about 21% of Microsoft's revenue. That's up from 9% just three years ago. So Azure is the growth engine here driving up just stellar results from Microsoft.

- When we heard about supply chain from the company, because that's something we're paying attention to from everyone pretty much, they've talked about the effect on the Xbox business, but that things should start to maybe improve going into next year. Is that something that is a concern for you?

BRENT BRACELIN: Gaming has kind of become one of the $10 billion kind of segments. It is kind of an area that you'd like to grow further. You saw better than expected kind of growth, even with tough Xbox competitors, a year ago. But the real story here continues to be cloud. This mix shift to cloud is closing in on about 50% of the revenue. I think that's going to mask their share gains on prem and will mask any sort of slowdown or supply chain issues they have on those much smaller kind of gaming Xbox business. So the story I think still is cloud.

- And can we ask about advertising here? It's Brian, by the way. So that crossed over the $10 billion run rate milestone you noted. What's the story for that? Is that also going to be a narrative, even if cloud is kind of catching all the attention here in the quarters to come?

BRENT BRACELIN: Yeah. I mean, listen, the company is very focused around driving durable growth. And one aspect of driving durable growth is the fact that you have multiple growth engines. And you're absolutely spot on. Advertising crossed over $10 billion for the first time. I don't think most people think of Microsoft as an advertising business. But they do have lots of communities, developer communities, obviously a big LinkedIn community.

And you're gonna see, I think, advertising, given that's a $500 billion market, Microsoft small player in it today, but absolutely thinking over the next 5 to 10 years, watch Microsoft. I do think that advertising will be a targeted area they focus on. And just like they're gaining share in cloud, I think there's an opportunity to gain share in another very big market. Advertising.

- Brent, I've been very impressed with the cash levels coming out of big tech. Facebook last week. Alphabet yesterday. Microsoft. I mean, billions of dollars in cash. Microsoft is putting some of that to use repurchasing their stock. But given the levels they are sitting on, I do expect another acquisition from Microsoft in the next 12 months. And what could be attractive to them?

BRENT BRACELIN: Lots of different areas that we think Microsoft could acquire. So, yes, we think Microsoft will continue to be acquisitive. I think there's plenty of opportunity for them to continue to kind of expand their cloud application footprint. If you think about it, they have less than 10% market share in front office applications. They have over 80% share in middle office productivity tools. But really, less than 10% share in back office as well. So plenty of cloud application companies they could go out and acquire and really strengthen their enterprise footprint.

But I wouldn't just isolate it to just enterprise kind of applications. Again, talked a little bit about advertising. Wouldn't be surprised if they were to go after some consumer orientated kind of opportunities out there that really bolsters that advertising business as well. So, absolutely, you always have to think about Microsoft being acquisitive, just given the success they have, the growth focus of the company, and then obviously the cash war chest they have.

- Yeah. A lot of financial firepower. That much is for sure. Brent Bracelin, analyst at Piper Sandler. Thanks for taking out a few minutes this morning. Appreciate it.