Microsoft Cloud Services Contribute to Company's Big New Valuation

It’s number three! Microsoft has a market value of approximately $760 billion, $160 billion behind Apple, $30 billion behind Amazon and $15 billion ahead of Google. This is the highest valuation the Redmond, WA-based company has had.

The reason for the rise? Microsoft's booming cloud business. When CEO Satya Nadella took over in 2014, he redirected the company's focus and his decision has paid off. In fiscal year 2014, the company reported $83.2 billion in revenue. Three-quarters of the way through fiscal year 2018, its already made $80.2 billion; even if the last quarter only matches Q4 2017 $23.3 billion, that means the company will have made over $100 billion in revenue this year.

In 2016, Microsoft reorganized how it reports revenue, dividing its business into three divisions: Intelligent Cloud, Productivity and Business Processes, and More Personal Computing.

The Intelligent Cloud division encompasses server products and cloud services (i.e. Azure) and enterprise services. From Q1 2016 to the most recently-reported quarter, Q3 2018, the Intelligent Cloud's increased its quarterly revenue from $5.9 billion to $7.9 billion.

The story Microsoft tells most often about this division is about Azure's meteoric sales increases. When reporting quarterly results, companies usually compare year-over-year numbers to gauge progress (or lack thereof). The sales increases Microsoft reports for Azure from 2016 show an unbroken stream of revenue gains that have nearly (or more than) doubled when compared to the same time a year ago:

While Azure's growth is often what industry analysts focus on to explain the company's growth, Microsoft's other cloud-based products are also doing brisk business. The Productivity and Business Processes division features cloud-based Office subscriptions for both enterprise and consumer customer bases, and its revenue has consistently trended upward. From Q1 2016 to the most recently-reported quarter, Q3 2018, Productivity and Business Processes revenues have shot up from $6.3 billion to $9 billion.

Growth across Azure and its collaboration tools are in part thanks to its deep reach within enterprises and strong partner ecosystem, areas where Google has historically struggled to keep pace.   

“Microsoft is leveraging its tremendous sales reach and ability to bundle Azure with other Microsoft products and services in order to drive adoption; Office 365 customers often decide it is most logical to adopt Azure,” Gartner said in its most recent Magic Quadrant report for IaaS. “Microsoft is steadily growing the size of Azure customers; many are beginning to spend more than $500,000 a year, and a growing number exceed $5 million in annual spending.”

As Microsoft continues to invest in artificial intelligence capabilities and apply them across its cloud offerings, including Outlook, these enterprises will likely increase their cloud spending or transition to higher margin cloud services.

“Sometimes, when you have new workloads and new customers onboard, they start with, in some sense, the IaaS and the data more at Blob storage, but then scale to higher layer services like our Cosmos DB or even some of our compute higher-level services like in AI,” Nadella said in an April earnings call. “So that I think will continue, because we're still in the early innings of the cloud transition. We're investing aggressively, whether it's on the field side or on the CapEx side to attract more customers and more workloads per customer. So they will have that same profile, which is lower-margin services first, higher-margin services over time. That's just inside of Azure. And of course, you combine that with the rest. One of the things that I think should be fairly clear is the high correlation between our services in Office 365 as well as Dynamics 365 around data in particular with Azure. So that's why we think of this as one cloud play but that should give you a feel for how the customers are looking at it.”