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How Microsoft Is Targeting the Cloud for Growth

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Microsoft’s strategy to strengthen and expand its reach in the cloud

Earlier in the series, we discussed analysts’ expectations for Microsoft’s fiscal 3Q16 results. In this article, we’ll look at Microsoft’s (MSFT) offerings that could drive its growth in the future.

Given the company’s aggressive initiatives to increase its stance and growth in the cloud space, it’s very likely that Microsoft’s Intelligent Cloud will continue to post a strong performance. Within Intelligent Cloud, Microsoft has server products, MS Azure, mobile tracking devices, and data centers. A month back, Microsoft announced that it’s freeing its SQL Server to run on Linux OS. This was a major step for Microsoft, as the company is known for its Windows-centric strategy. By bringing its SQL Server to Linux, Microsoft’s Azure, its cloud-computing platform, can run on Amazon Web Services (AMZN), which is a public cloud and mainly Linux-based.

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Factors that are prompting Microsoft to adopt Linux

By making SQL Server database available on Linux OS, Microsoft not only aims to improve its position in the cloud, but also the database space, which is currently dominated by Oracle (ORCL). Oracle also supports Linux. IBM (IBM) and SAP (SAP) are other prominent players in the database space.

The above chart shows the contribution of various products toward Microsoft’s overall revenues in fiscal 2015. The top position, which Windows used to occupy, now features Microsoft’s cloud and server products. The changing revenue streams explain Microsoft’s shift from its Windows-centric strategy.

In response to Microsoft’s increased support for Linux, Mark Russinovich, chief technical officer of Microsoft Azure, stated, “It’s obvious, if we don’t support Linux, we’ll be Windows only and that’s not practical.”

Investors who want exposure to Microsoft could consider investing in the Technology Select Sector SPDR ETF (XLK). While XLK invests ~10.6% of its holdings in Microsoft, it also has an exposure of ~38% to application software. Later in the series, we’ll discuss how Office 365 will contribute towards Microsoft’s cloud revenues in fiscal 3Q16.

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