Microsoft Stock Forecast (NASDAQ: MSFT): Alibaba And Tencent Can Slow Down Microsoft Azure

Microsoft Stock Forecast

motek 1The article was written by Motek Moyen Research Seeking Alpha’s #1 Writer on Long Ideas and #2 in Technology  – Senior Analyst at I Know First

Summary:

  • I Know First has pessimistic market trend forecasts for Microsoft’s stock. Investors should do profit-taking while this stock still trades above $90.
  • Microsoft’s recent management team shake-up is not inspiring investors to rally behind the stock.
  • I can explain this algorithmic bearishness to Microsoft’s inability to dislodge Amazon Web Services’ leadership in cloud computing infrastructure services.
  • Based on most-recent quarter signals, hedge fund managers have a very negative sentiment over Microsoft. No real revenue/profit numbers for Azure is discouraging.
  • Azure is unlikely to gain a foothold in China’s $103 billion cloud computing industry. Alibaba Cloud will dominate China and threaten current global leaders.

Microsoft’s (MSFT) continuing inability to supplant Amazon (AMZN) Web Services as the leader in cloud computing infrastructure services explains why I Know First has bearish algorithmic market trend forecasts for MSFT. Yes, Azure is still the fastest growing service provider. However, Amazon Web Services is still the runaway leader with more than 35% global market share.

The chart above says MSFT is unlikely to have meaningful upside potential for the next 90 days. This is in spite of Nadella’s recent re-organization of Microsoft’s management team. The new management team is putting more priority on cloud computing over Microsoft’s Windows business segment.

By injecting new managers, Microsoft could perhaps convince hedge fund managers to start accumulating MSFT shares again. Based on the most-recent quarterly review of TipRanks, hedge fund managers dumped 41.8 million MSFT shares in Q4 2017.

(Source: TipRanks.com)

Microsoft’s stock could only breach $100 after it gets the backing of more hedge fund managers. To deliver this, Nadella must convince investors (small and large) that Azure can reach 20% market share in cloud computing infrastructure services. After four years of trying, Azure still has less than 15% market share. This is less than half of Amazon Web Services’ 35% market share.

Amazon Web Services added $17.46 billion to Amazon’s FY 2017 annual revenue. Microsoft never released any real annual revenue number from its Azure business segment. It must be much lower than Amazon’s.  This opaque treatment of Azure’s real-world sales/profit numbers is again why many investors are no longer very enthusiastic regarding Nadella’s cloud-first vision for Microsoft. Rather than touting that Azure is growing 98%, Microsoft needs to reveal the specific revenue and profit numbers. Doing so can help investors and analysts evaluate Azure’s real-world financial performance.

Competition From Alibaba Cloud

Like it or not, Microsoft Azure is going to rack up operating losses if it tries to continuously compete with Amazon’s low-margin approach to AWS packages.  Another emerging threat to Azure now is Alibaba’s (BABA) recent emergence as the new no.5 player in the global infrastructure services industry. Being a Chinese company, Alibaba could use low-ball pricing to quickly catch-up with Microsoft, IBM (IBM), and Google (GOOG).

As of Q3 2017 earnings report, Alibaba Cloud is now poised to generate $2.2 billion in annual revenue from cloud computing infrastructure services. With Alibaba Cloud around, Azure is unlikely to gain any serious foothold in China’s lucrative $103.6 billion cloud computing industry. Communist rulers will never fully entrust China’s cloud computing infrastructure to an American company like Microsoft.

Alibaba Cloud has more than 47% market share in China’s PaaS (Platform-as-a-Service) industry. Study the chart given below. Only Chinese companies are obviously allowed to provide PaaS inside China.

Going forward, Tencent (TCEHY) is likely to imitate Alibaba Cloud’s global expansion. Tencent Cloud is also unlikely to unseat Alibaba Cloud’s leadership in China. Tencent Cloud therefore will seek growth outside China. Tencent Cloud, therefore, is another emerging threat that can slow down Microsoft Azure’s race to catch up to Amazon Web Services.

Conclusion

I cannot rate MSFT as a buy right now. With zero chance of breaking in to China, Azure’s growth rate is slated for a slowdown. A decelerating Azure is an obvious headwind for Microsoft. Alibaba Cloud and Tencent Cloud are imminent threats to Microsoft Azure and Amazon Web Services.

Going forward, there is high probability that Alibaba and Tencent could replicate Huawei and ZTE’s conquest of the global telecommunications infrastructure services. Unless Microsoft can come up with compelling features for Azure, three years from now Alibaba Cloud could become the new no.2 player in the cloud computing infrastructure.

Past I Know First Forecast Success with MSFT

I Know First has made accurate predictions on MSFT in the past, such as its 3 months bullish article published on June 14, 2017. In the article, we discussed Microsoft plans announcement on bringing the iTunes app to the Windows Store and the future of mixed reality, a mesh of virtual and augmented reality, potentially being a very lucrative venture for Microsoft in the future. Since the article’s release, MSFT shares have increased by 6.97% in line with the I Know First algorithm’s forecast. See chart below.

(Source: Yahoo Finance)

This bearish forecast for MSFT was sent to I Know First subscribers on June 14, 2017.

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I Know First Algorithm Heatmap Explanation

The sign of the signal tells in which direction the asset price is expected to go (positive = to go up = Long, negative = to drop = Short position), the signal strength is related to the magnitude of the expected return and is used for ranking purposes of the investment opportunities.

Predictability is the actual fitness function being optimized every day, and can be simplified explained as the correlation based quality measure of the signal. This is a unique indicator of the I Know First algorithm. This allows users to separate and focus on the most predictable assets according to the algorithm. Ranging between -1 and 1, one should focus on predictability levels significantly above 0 in order to fill confident about/trust the signal.

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