Microsoft’s cloud business ‘remains a bright spot,’ analyst says

Piper Sandler Equity Research Cloud Software and Analytics Analyst Brent Bracelin joins Yahoo Finance Live to discuss the quarterly earnings report for Microsoft as well as the outlook for Microsoft’s cloud business.

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JULIE HYMAN: I'm just going to say it. Today's market action, it's a little weird. The S&P 500 earlier was up as much as 1.4%. Now it's in the red. So we just are getting these odd sort of gyrations following on the big sell-off that we saw yesterday in the markets that sent the NASDAQ down by nearly 4%, its biggest sell-off since September of 2020. So now seeing some sort of reverberations, perhaps, of that, reverberations of earnings reports as well, that are sending the markets swinging relatively wildly today.

Now the S&P 500 peaking again into the green. So we'll see where we end up closing today. But I mentioned in the earnings reports that are pushing stocks in various directions today. Of course, Microsoft was one of those companies. Those shares have been pretty solidly in the green since its report. They're up almost 5% right now. The company in particular saw gains in Azure and its other cloud services.

Our next guest says that growth is cementing Microsoft's new position as a cloud company, at least, in part. Joining us now is Brent Bracelin, Piper Sandler equity research analyst of cloud software and analytics. Brent, good to see you. Thanks for being with us. So when we look at that 49% increase in Azure's business, what is it telling us about where we are in the sort of cloud growth cycle?

BRENT BRACELIN: Sure, there's no doubt that the global risks are increasing out there. And so what we've seen really out of Microsoft is this idea that cloud remains a bright spot. Azure in particular actually accelerating growth, even against the backdrop of increasing risks. Enterprises are increasingly turning to Microsoft basically to optimize their business, to drive higher productivity, to automate businesses. And that was, I think, the surprise to us. There absolutely is a narrative out there that people thought that maybe the cloud business for Microsoft and others was just a pandemic beneficiary.

And as the pandemic comes to a close here, as some of the global risks intensify, maybe the cloud growth would slow. That's not happening. And so I think while, yes, risks are increasing globally, inflation is increasing as a threat to these enterprises, they are still investing and transitioning to cloud. So that was really the bright spot for us that was a bit surprising relative to an area that maybe we thought might not be as good as expected. It delivered.

BRIAN SOZZI: Brian, another narrative off this quarter, and it's something that I was reminded of, too, is just how much of a well-oiled machine Microsoft is. Every quarter, very consistent, strong growth. But, you know, they obviously didn't talk about this last night with-- on the Activision Blizzard acquisition. But is that type of integration something that would throw Microsoft off its game?

BRENT BRACELIN: Not really. And as you think about Microsoft and where the strength came from this quarter, it was enterprise. It really was the enterprise business. Think about Activision as kind of a newer area for Microsoft that they're trying to double down in, and that's consumer. And there's a whole new opportunity around consumer, this community of gamers, the content that Activision brings as well.

So, you know, we think about Activision more as a diversification move for Microsoft that really won't really have much of an impact on the enterprise appetite to embrace Azure, to embrace Office 365, to drive higher automation and higher productivity for those employees.

JULIE HYMAN: I guess, my question coming off of that is, will that diversification be more necessary going into the coming year? In other words, you know, while the company doesn't seem to be suffering from a post-pandemic hangover, maybe it could suffer from a rising rate hangover or a heading into recession hangover, if companies do start to cut back on their spending. Do you expect that to happen?

BRENT BRACELIN: Yeah, so the way I would look at and frame technology risks, I would say the enterprise suppliers have less risk. So B to B is less risky. Right now, we're seeing a slowdown on the consumer side. The consumer orientated part of the world will be more volatile. It will be more sensitive. Enterprises spending demand tends to be a little more stable. And so absolutely they are getting into an area that might have a little bit more economic sensitivity to consumer spending overall.

But that really won't fold into their business until next year. And so they're going to be acquiring, I think, and diversifying a business that might have slightly more higher volatility, but there also is a big opportunity in advertising. Microsoft is not a big advertising player today. It's a small part of the business, maybe $10 billion business today. But with all that Activision content, there is an opportunity to really lever advertising into a new growth vector for Microsoft that can help diversify some of those consumer risks.

So, pay close attention to the advertising opportunity at Microsoft. Clearly, advertising has been a really big incremental growth and profit lever for Amazon, as you think about how quickly they were able to grow that advertising business. I think you can see Microsoft replicate a similar strategy here, leveraging some of that consumer content on the gaming side and that gaming community post the Activision close.

BRIAN SOZZI: Brent, I have 30 seconds left. Do you think, just based on what we saw from Microsoft's quarter, that the selling in big cap tech names is nearing an end?

BRENT BRACELIN: I think it's still very mixed. Our conversations with institutional investors is clearly very negative. Folks continue to be very concerned around increasing global risk. That said, my personal view is, it feels like we're kind of nearing peak bear sentiment. Everyone is universally bearish. All the investors we talked to are bearish. So typically, when you have all investors on one side of the boat, that's typically when the boat flips.

And so, listen, there is probably more risk for the next two quarters around slight changes to numbers, factoring FX risks, factoring in these increasing global risks, but from a sentiment perspective, it's hard to see how things can't get more bearish from here, just given everyone is so consistent with their bearish views.

BRIAN SOZZI: Brent Bracelin, Piper Sandler equity research analyst, cloud software and analytics, great to see you. We'll talk to you soon.