Microsoft’s Cloud Business Could Get Bigger After This Move

Markets Motley Fool

Microsoft's (NASDAQ: MSFT) cloud computing business is growing in leaps and bounds as it is pulling out all stops to wrest market share from market leader Amazon (NASDAQ: AMZN). The company's strategy of cutting prices and adding capabilities such as artificial intelligence and better security has worked wonders for it so far. In fact, Microsoft's public cloud service jumped to 7.1% market share in 2016, up from 5.8% the previous year, according to Gartner, while Amazon continued to lead the field with 44.2% market share. 

Continue Reading Below

What's more, Microsoft has sustained its ascent in the cloud computing space this year. Its cloud computing revenue shot up 14% year over year to $6.9 billion during the recently reported first quarter, driven by a 90% jump in Azure revenue to an estimated $1.3 billion. This was far better than the 42% jump in rival Amazon's revenue from its public cloud computing business -- Amazon Web Services (AWS) -- which pulled in $4.58 billion in revenue last quarter.

And Microsoft isn't done yet. Its latest cloud computing product could help it further gain on Amazon by targeting the fast-growing government cloud market that could be worth an estimated $28.8 billion in the next five years.

Microsoft's new platform could help it land government contracts

Microsoft recently announced that it now provides advanced cloud services to U.S. government agencies as part of its Azure Government platform, a dedicated cloud service for federal, state, and local government entities that meets strict regulatory requirements and security needs. And Microsoft wants to get deeper into this business with the newly launched Azure Government Secret offering.

Azure Government Secret has been equipped with advanced security features so that customers can store highly classified information. The platform offers cutting-edge security capabilities such as blockchain, and allows customers to use artificial intelligence and predictive analytics to make sense of the data they collect.

Continue Reading Below

It is clear that Microsoft is trying to jump on to popular trends in the government cloud space with this new offering. For instance, government agencies in the U.S. are increasingly adopting blockchain technology as it can protect information from cyberattacks thanks to a decentralized structure.

The opportunity and the competition

Microsoft is targeting key government customers such as the Department of Defense, the intelligence community, and other partners who need to work with secret data. This could be big business for the company as some estimate sales of blockchain technology could rise from $75 billion last year to $108 billion in 2019.

More importantly, Microsoft could the front-runner when it comes to government customers. The Azure Government cloud service was the only one to be awarded a Department of Defense Impact Level 5 provisional authorization by the Defense Information Systems Agency last year, and Microsoft claims to be the only one to have delivered a physically isolated cloud at this level.

By comparison, Amazon Web Services achieved the Level 5 provisional authorization just last month, so Microsoft has a head-start. This could be just the catalyst that Microsoft needed to break AWS' stranglehold over the defense sector, but it is easier said than done.

Currently, AWS' GovCloud is the go-to cloud service provider for 17 defense agencies in the U.S., boasting a $600 million CIA contract, for instance. AWS' dominance in the government cloud market could be attributed to its security features that exceed the Department of Defense's needs, and the Level 5 authorization could bring more revenue as departments entrust Amazon with more sensitive data.

However, Microsoft is going all out to differentiate its government cloud against AWS'. In fact, AWS doesn't offer its full range of services on the government cloud platform, and Microsoft could take advantage of this  by deploying in-demand solutions such as blockchain. On the other hand, AWS is currently offering Blockchain-as-a-Service for the financial services industry, with no mention for government applications just yet.

Therefore, Microsoft is pulling the right strings. There is a big revenue opportunity present in this government cloud space and the company's strategy of catering to the needs of government departments will play a crucial role in helping it make a dent in this space.

10 stocks we like better than Microsoft
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Microsoft wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of November 6, 2017

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.