Microsoft's big earnings beat is because of one business that is exploding
Microsoft released promising earnings on Thursday.
The company's shares jumped around 1% after its reported a 13% increase in revenue, in large part due to its exploding cloud business.Microsoft's cloud computing platform reported $7.43 billion in revenue, an 11% increase year over year. The growth in this unit is huge. The company posted 97% year-over-year growth in its cloud computing platform Azure, as well as a year-over-year growth rate in the mid-90 percent range for both the second and third quarters, according to a note by Credit Suisse.
"Our Outperform thesis on MSFT is based on our expectations for strong earnings power potential over the next few years, at least, fueled by (1) significant commercial cloud growth and (2) higher cloud gross margins over time," Credit Suisse wrote in the note.
Credit Suisse has a price target of $84, which is 13.8% higher than the current share price. The growth of the cloud is a huge opportunity for Microsoft, and it has done a good job of exploiting it, according to the bank. In a survey conducted by Credit Suisse, 40% of respondents said Azure was their preferred cloud platform, which was nearly double the number from just six months before.
Azure isn't the only fast growing cloud business for Microsoft. For the first time, the company's cloud version of its Office productivity software outpaced its traditional versions. Revenue from Office 365 Commercial, the cloud version of office, grew 43% compared to last year.
In 2015, CEO Satya Nadella said Microsoft wants to hit a $20 billion run rate for its cloud computing business by the end of its 2018 fiscal year. Having just ended its 2017 fiscal year with a run rate of $18.9 billion, it looks as if it will meet that goal handily in the next year. Microsoft's run rate is calculated by the company by multiplying revenue in the last month of the quarter by 12 to estimate the revenue from that business over the next year.
Microsoft is up 17.72% this year, and down slightly on Friday after announcing its earnings on Thursday after the bell.