By Beth Kindig
Microsoft’s quarterly results to be released this week will tell us whether fears about the cloud-software industry are warranted.
Revenue growth in the cloud sector has been phenomenal and, according to research firm Gartner, is poised to accelerate.
Morgan Stanley and Evercore ISI analysts aren’t so bullish. They downgraded some cloud companies before they released earnings. The stock market showed tension cracks last week when Workday /zigman2/quotes/201157610/composite WDAY -0.80% said human-capital-management-software growth was slowing to a 20% pace. Shares of Workday, Okta /zigman2/quotes/210420951/composite OKTA -0.08% and Slack Technologies /zigman2/quotes/212180539/composite WORK -0.23% among other companies, tumbled in response.
This week, we will see if the momentum from growth to value picks up steam. Don’t be surprised if cloud companies continue to report strong earnings. The goal for investors is to tune out the noise, as cloud-revenue growth is likely to defy the odds.
Microsoft earnings preview: The death of Windows 7 is almost here
In a sweet spot
Microsoft /zigman2/quotes/207732364/composite MSFT +0.03% is at an inflection point for cloud software (also known as SaaS) and cloud infrastructure (IaaS). Well-rewarded revenue growth in the cloud sector has taken more than a decade to accumulate, measuring a market worth $40 billion in IaaS and $95 billion in SaaS. However, it will take only three years to double this revenue. Although many cloud stocks will reap those benefits, Microsoft is especially well-positioned.
According to Gartner , the cloud-services industry will grow at nearly three times the rate of overall IT services through 2022. Cloud infrastructure-as-a-service will grow at 27.5% in 2019 to $38.9 billion, and will reach 76.6 billion by 2022, or nearly 100% growth.
Other areas where Microsoft excels, including platform-as-a-service (PaaS) and SaaS, will also nearly double. This helps to cement Microsoft’s IaaS market share, as Gartner also predicts 90% of organizations will purchase public cloud IaaS and PaaS from a single provider.
Although it’s likely there will be some ups and downs on a quarterly basis, the market may be surprised to find that growth across the cloud industry occurs with, or without, a perfect economy.
This has been a challenging time for tech stocks, yet Microsoft’s shares have returned nearly 29% (with dividends reinvested) for one year through Oct. 18, compared with much lower returns for Amazon.com /zigman2/quotes/210331248/composite AMZN -0.15% , Alphabet /zigman2/quotes/205453964/composite GOOG +0.37% /zigman2/quotes/202490156/composite GOOGL +0.36% and Apple /zigman2/quotes/202934861/composite AAPL -0.63% :
Previous earnings reports
Microsoft’s stock has performed better because its hybrid cloud strategy began to take hold in 2018, two years after the first technical preview in 2016, and this spurred faster growth than the market estimated.
Last quarter, Microsoft beat revenue expectations by $920 million and the consensus earnings per share (EPS) estimate by $0.16. The company exceeded expectations handily in the two quarters before that as well.