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Microsoft stock has had a remarkable renaissance with CEO Satya Nadella at the helm, driven in particular his full embrace of cloud computing, with the companys Azure public cloud business at the heart. And as one analyst notes this morning, Azure could become a bigger operation than you likely imagine.

In a research note Monday, Stifel Nicolaus analyst Brad Reback notes that Azure is already at a $17 billion annualized revenue run ratebut that businesses that are potential customers are still in the early stages of shifting computing to the could, with less than 10% penetration so far. He notes that there is potential for more of the kind of gigantic contracts like the recent Defense Department $10 billion JEDI contract, in which Microsoft beat out a competing bid by Amazon.coms (AMZN) Amazon Web Services.

Reback rates Microsoft stock (ticker: MSFT) at Buy with a $160 price target.

Over the last several quarters, it has become increasingly clear, based on large cloud deal activity and strong hybrid cloud growth, that as enterprises of all sizes begin their respective digital transformation journeys, Microsoft is effectively tapping into sizable Tier-1 enterprise workloads that it was not directly exposed to in the client/server world, Reback writes. The emergence of the hyperscale cloud has fundamentally changed the landscape, allowing Microsoft to now provide many of the services to customers that it used to leave for partners.

In his note, Reback rattles off a string of recent large public cloud contracts. Snap (SNAP) has a $2 billion, five-year deal with Alphabets (GOOGL) Google Cloud, and a $1.1 billion commitment over five years to AWS. Pinterest (PINS) has a $750 million six-year deal with AWS. Apple (AAPL) spent $350 million with AWS in 2018. And he points out that Allianz, AT&T, BMW, Campbell, Columbia Sportswear, GAP, Kroger, Nuance, Salesforce.com, Sony, Walgreens Boots Alliance and Walt Disney Studios, among others have all announced large Azure deals with Microsoft in recent quarters.

His point is that there remains a huge opportunity for the public cloud players, including AWS, Google Cloud, and Azure.

Reback models the Azure business, which was $12.4 billion in the June 2019 fiscal year, at $26.7 billion in fiscal 2021, $35.2 billion in fiscal 2022, and more than $90 billion by fiscal 2030. By FY 2023, he says, it will be larger than Microsoft Office, Windows, and the Server and Tools businesses.

Microsoft stock is down 0.3%, to $149.59.

Write to Eric J. Savitz at eric.savitz@barrons.com

Excerpt from:
Microsofts Biggest Business Could Be the Cloud by 2023, Analyst Says - Barron's