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Why Is Microsoft’s Stock Likely to Continue Its Upward Journey?

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Improved performance in the cloud

While Microsoft’s (MSFT) Azure continues to see increased adoption—which is evident in its continued triple-digit growth journey in fiscal 1Q17—we should remember that the company’s Office 365 and Dynamics offerings were instrumental in its 100% growth in the cloud space in calendar 2Q16.

Mark Moerdler, an analyst at Sanford C. Bernstein & Company, has an “outperform” rating on company’s stock and stated that “cloud is growing significantly, and Azure represents incremental new revenue,” adding that “commercial cloud is driving revenue growth, which is somewhat hidden by the fact that Nokia is going to zero.”
commercial cloud run rate

Microsoft’s triple-digit growth in the cloud space will further get a push when its Azure Stack is released in 2017. Azure Stack has been designed and developed by Microsoft to facilitate the running of the organization’s own data centers while having the same interface as Microsoft Azure.

The cloud as a whole grew 51%, with the top four players—Amazon.com (AMZN), Microsoft, IBM (IBM), and Google (GOOG) (GOOGL)—collectively reporting 68% growth.

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Data centers to expand commercial cloud margins

Microsoft not only managed to consistently record growth in its cloud offerings, it also showed an expansion in its margins. The company’s commercial cloud margins recorded a 7% sequential improvement in 1Q17. This improvement in Microsoft’s commercial cloud margins boosted market sentiment toward the stock.

Bloomberg reported that Microsoft has invested spent $3 billion on data centers to expand its cloud offerings. Microsoft’s investments will continue in this space with new sites expected in France (EWQ) in 2017.

In its fiscal 4Q16 earnings release, Microsoft Chief Financial Officer Amy Hood stated: “We expect the commercial cloud gross margin percentage and dollars to materially improve next fiscal year.”

To be sure, investments are starting to yield results, given the improvements in Microsoft’s commercial cloud margins in fiscal 1Q17.

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