Microsoft recently passed Google in valuation and the company’s stock price has never been higher. At $760 billion, Microsoft’s market cap now surpasses Google’s $745 billion, and falls behind Amazon by a mere $30 billion. Just this year alone, Microsoft has seen its value increase by 15%, in no small part due to its cloud services.
After Microsoft’s CEO Satya Nadella took the place of long-time CEO Steve Ballmer, Nadella began to focus primarily on cloud computing. As Software-as-a-Service, big data, and hosted solutions became standard throughout organizations of every industry, cloud computing became even more important. Both Office 365’s Software-as-a-Service solutions and Microsoft Azure’s cloud hosting have been immensely successful. It’s expected that the company will continue to grow at a rate of 10%, in terms of sales and profit, largely due to this.
Nadella further made a large investment in LinkedIn in 2016, purchasing the social media platform for $26 billion. With LinkedIn integration, many of Microsoft’s solutions become even more valuable, and are able to provide a business-related functionality that is not available through other services such as AWS. This sets Microsoft apart from its cloud computing competitors, in addition to making it so that Microsoft is one of the leading choices for companies that want functionality with ease-of-use.
A year ago, it appeared as though Alphabet was poised to remain the market leader. However, in the past 12 months, Microsoft has posted gains 5 times the amount of Alphabet. Microsoft has radically reorganized its structure and pivoted, to take advantage of changes in the way that businesses do business.
Meanwhile, Google has been experiencing issues with profitability. Though Google has still been recording extraordinary sales, the cost of these sales have been going up. Consequently, Google is falling short of its profit expectations, which directly impacts its share valuation.
Google pays out more for mobile searches than for desktop searches. As customers have switched to mobile devices, searches have become more expensive. Online advertising accounts for 85% of Google’s sales, which, in turn, is the major profit center for the parent company Alphabet. The organization’s primary focus is currently on Google, YouTube, and Google Cloud, while many of the company’s other projects are not profitable.
Google has additionally experienced a few major controversies within the last year, including a one regarding company culture, gender, and discrimination. YouTube has been under fire multiple times, as childens’ channels were exposed for being inappropriate for kids, and a major YouTube star ignited a fierce debate about how the company deals with offensive speech.
Though these issues were not indictments of the company itself, they served to underscore the difficulties that YouTube will have in the future regarding the policing of its own content, and the potential liability or legal issues the platform may face in the coming years. This is especially true due to new regulations that may make content aggregation services ultimately responsible for the content that they host.
As of Q1 2018, Amazon Web Services holds 33% of the cloud infrastructure market, Microsoft holds 13%, and Google holds only 6%. It’s easy to see that Microsoft is gaining ground swiftly on AWS, and has lapped Google in the area of web-based services. At the same time, Google (or, more specifically, its parent company Alphabet) is not designed strictly for profit and does spend a lot of its resources on innovative projects that are not necessarily expected to make money.
Microsoft may be a good buy, with its profit potential increasing and its new CEO headed confidently down a new path. Whether it is able to counter Amazon’s web services (and whether it is able to continue to grow into the AWS space) remains to be seen. There is a limit to growth within the cloud infrastructure market; most businesses are going to use either Microsoft, Amazon, or Google, and many companies are going to be hesitant to transition once entrenched.
Regards,
Ethan Warrick
Editor
Wealth Authority
