Microsoft To Get A Major Revenue Growth Boost From Cloud Computing

| About: Microsoft Corporation (MSFT)

When people think of Microsoft (NASDAQ:MSFT) they usually think of it as an old, malfunctioning company of the past. They usually think it is a two product company (with just Windows and Office) that was lucky enough to succeed in a third one (XBOX) but nothing more than that.

However nothing could be further from the truth. Microsoft has several products and services to offer to consumers and businesses all over the world. Today I will only focus to a few of them that are not so well-known but have the potential to change Microsoft's revenue mix and boost its revenue growth dramatically. All these services/products have one thing in common, they are offered through the cloud.

Azure is Microsoft's solution to businesses seeking a flexible and cost-efficient way to use internal cloud based applications of their own or other's design. It also allows businesses that have a variable need for IT infrastructure (computing power, storage etc.) to use as much as they need when they need it through Microsoft's cloud platform.

Azure has become one of Microsoft's "star" products since it reached $1 billion in annual revenue and has increased subscriptions by 48% during the past 6 months. Azure commands a 20% market in its market and its main competitor Amazon's (NASDAQ:AMZN) AWS which has 71%. However Azure is rapidly gaining ground and according to Forester Research it could reach 35% market share within the next year.

Skype is the well-known communication app that Microsoft bought in 2011. After becoming a part of Microsoft Skype has done extremely well. A third of the world's voice calls are done through Skype. Microsoft integrated Skype with its new platform increasing the attractiveness of both these products. Furthermore, Skype along with Lync (an instant messaging, VOIP and video conferencing app) have reached $2 billion in annual revenue and continue to grow.

Office 365 is Microsoft's transformation of Office to the SaaS (Software as a Service) business model and so far it has done an excellent job. Office 365 is growing and has already reached the $1 billion annual revenue mark. Through this change Microsoft gains two things; first it enjoys increased customer loyalty and the end of pirated copies of its Office products. Second it will be possible to offer constant upgrades to users staying always on top of their needs.

Azure, Skype, Lync and Office 365 are the three products that are leading a wider transformation that happening in Microsoft. If you add in the picture Microsoft Dynamics (ERP & CRM systems) and Sharepoint (a team collaboration and project management software) it becomes quite clear that Microsoft is evolving to one-stop shop for essential productivity-boosting applications a modern enterprise is bound to have.

This is an excellent route for Microsoft to take because it builds on the company's strengths in the server market attracting businesses that are looking for all-around solutions. Furthermore, in this way Microsoft increases customer captivity and loyalty since customers that are already on Microsoft's products will first turn to Microsoft if they have some new need instead of looking or switching to a third-party provider.

All the above mentioned products generate about $7 to $8 billion of revenues for Microsoft accounting for a little more than 10% of its sales. Although they look insignificant they have the potential to boost Microsoft's earnings for many years ahead. The reason is that the cloud market has still many years of double digit growth ahead.

More specifically, according to Gartner Infrastructure as a Service and Platform as a Service (Azure's markets) will grow at average annual rates of 41% and 27% respectively, through 2016. ERP and CRM will grow at annual paces of 23% and 16% and Skype keeps taking market share from telecoms at an astonishing rate.

The bottom line? Microsoft's revenue from these products can easily double or triple (if it gains market share) within the next three years. Even if Microsoft didn't have other growth stories developing (Windows Phone, Xbox, Surface, Windows 8) its growing involvement in the cloud computing market ensures a bright future for both the company and its investors.

Disclosure: I am long MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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