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Blue Skies Ahead for Microsoft's Azure

We see a massive market opportunity for the undervalued company.

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We recently attended  Microsoft’s (MSFT) Build 2018 developer conference in Seattle, and we remain convinced that the company’s Azure public cloud service will maintain its elite status alongside Amazon Web Services (AMZN) in the infrastructure-as-a-service and platform-as-a-service market. We were encouraged to see the company progressing on many of the announcements made at last year’s Build, which we believe is helping accelerate large enterprise adoption of both public and private cloud services. We are maintaining our wide economic moat rating for Microsoft, whose shares remain the most undervalued in our software coverage, trading at a 16% discount to our $117 fair value estimate.

We think the market opportunity for IaaS and PaaS numbers in the hundreds of billions, as large public cloud vendors will consolidate IT spending that was once allocated to disparate vendors around a small handful of strategic providers. We view Microsoft as one of those strategic providers, and we believe its Azure offering will grow at a 31% compound annual rate over the next 10 years, eventually contributing north of 35% of total revenue by the end of our explicit forecast period compared with an estimated 9% in fiscal 2018.

Rodney Nelson does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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