Microsoft is winning the cloud wars and becoming Wall Street's new golden child

By Hannah Pedone and Emily Bary Various factors indicate that Microsoft is in a better financial position than its cloud rivals, analysts say CEO Satya Nadella has won back Wall Street's trust. After spending a good chunk of the past year in Wall Street's doghouse, Microsoft currently stands as the winner among the major cloud companies. Jefferies trading-desk analyst Jeffrey Favuzza issued that verdict following Amazon.com's (AMZN) Thursday earnings report, which showed cloud growth coming up short of what some investors were expecting. Amazon's cloud business increased revenue at a 39% clip in the third quarter, while analysts tracked by FactSet had been expecting 37% growth. But institutional investors had been targeting growth more in the neighborhood of 43% to 44%, various analysts noted ahead of Amazon's report. The report from Amazon makes Microsoft (MSFT) "look even better," Favuzza wrote in a note to clients. That's even with the "frustrating price action" seen in Thursday's regular session, as Microsoft's stock gave back its early gains to close fractionally lower. Microsoft's cloud growth seemed to sit better with Wall Street. The company increased revenue in its Azure cloud business by 48% in the September quarter, above a forecast for 44% to 45% growth that the company had offered back in September. And the company projected growth of 49% to 50% for the December quarter. Favuzza wrote that the "tactical pecking order" among the big cloud companies seems to have Microsoft on top, followed by Meta Platforms (META), Amazon and then Alphabet (GOOG) (GOOGL), which just saw its worst one-day stock decline on record. Microsoft also stands out from the bunch because of its free cash flow, according to Greg Halter, the director of research at Carnegie Investment Counsel. The other three companies reported negative free cash flow for the third quarter, meaning that they spent more on infrastructure, data centers and related purchases than they generated in cash through their businesses. Microsoft's free cash flow stayed positive. "We pay a lot of attention to FCF, and the market may be trying to instill some spending discipline into these companies," Halter said. He hearkened back to the idea of "bond vigilantes," a famous term coined by economist Ed Yardeni to describe investors who shun debt until yields rise and they get paid more. Now, he noted, we might be looking at a case of "AI-spending vigilantes." Investors are drawing a hard line against companies deemed to be spending excessively without the returns to show for it. Don't miss: Microsoft to raise up to $25 billion in bond market as investors get pickier about AI debt binge Another thing working in Microsoft's favor is that the company "did more with less" - meaning that it was able to beat expectations with its Azure cloud growth even while capital expenditures, or infrastructure-related spending, came in $5 billion lower than the company had been modeling. That's according to Patrick Walravens, the head of technology equity research at Citizens, who told MarketWatch that Microsoft's AI strategy is broadly resonating with customers. "As AI advances faster and faster, the key thing enterprises are looking for is trust," he said. "Microsoft under [CEO Satya] Nadella's leadership has made trust a core part of its AI strategy, giving enterprises the ability to run, govern and distribute AI while retaining control of their data, models and intellectual property." -Hannah Pedone -Emily Bary This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

Microsoft is winning the cloud wars and becoming Wall Street's new golden child

Інші новини компанії