Microsoft's Azure Is No AWS, Says Bearish Jefferies

Microsoft Corporation MSFT, its stock and its Azure cloud platform have done an excellent job of keeping pace with Amazon.com, Inc. AMZN in the past three years. Amazon shares are up 173.7% in that stretch, while Microsoft shares are up 175.7%.

Investors should understand that Microsoft is no Amazon, according to Jefferies. 

The Analyst

John DiFucci reiterated an Underperform rating for Microsoft and raised the price target from $80 to $90.

The Thesis

There’s no questioning Microsoft’s success as a software company and its pivot to the cloud, DiFucci said in a note. (See his track record here.) 

Yet investors should not expect Azure to take the same trajectory as Amazon Web Services, he said. 

“We understand the overwhelming majority of investors have a very positive bias toward MSFT, but we do not believe the current price reflects the material risks associated with a major profit center of the company (i.e., Windows), or the long-term potential margin of everyone’s darling (i.e., Azure)." 

Investors seem to be blinded by Azure’s impressive revenue growth — and appear to be assuming that Azure will follow in AWS’s footsteps when it comes to margins and profitability, DiFucci said.

An apples-to-apples comparison of Azure and AWS at a similar scale indicates that Azure’s margins were negative when AWS’s margins were roughly 20%, the analyst said.

Cultural differences at Microsoft, technological differences at the two companies and pricing pressures on Azure will keep margins well below those of AWS, he said.

Over time, Amazon may also feel pricing pressure eat into AWS margins, making life even more difficult for Azure, DiFucci said. 

Recent revenue and earnings outperformance by Windows is likely unsustainable given Microsoft’s limited pricing leverage in a nearly monopolized market, according to Jefferies. 

Price Action

Microsoft shares were down 2.14% at $134.83 at the time of publication Tuesday following the bearish commentary.

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