The 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:

• Microsoft has spent more than a decade competing against Sony’s PlayStation in video games hardware/software sales.
• Two days ago, Microsoft and Sony announced a new partnership in cloud gaming. This was a necessary alliance against Google’s Stadia platform.
• Microsoft needed Sony’s expertise in streaming video games from its years of operating PlayStation Now. Sony needed Microsoft’s Azure global cloud platform.
• Microsoft’s Azure data center/server farm network is more successful than Google Cloud. Azure therefore gives Sony a better way to grow PlayStation Now.
• The extra revenue from hosting the streaming video games of Sony can further boost Microsoft’s cloud computing revenue.

Microsoft (MSFT) Azure is already the world’s no.2 cloud computing infrastructure service provider. The new cloud gaming partnership with Sony (SNE) can help Microsoft Azure grow faster against Amazon (AMZN) Web Services. In spite of the competition from Microsoft’s Xbox One, Sony’s PlayStation 4 has sold more than 91 million units. Majority of these PlayStation 4 owners will likely become future customers of Sony’s next iteration of its streaming video games platform, PlayStation Now.

There are no exact numbers revealed for Azure’s historical revenue. However, Azure is under Microsoft’s Intelligent Cloud segment. Intelligent Cloud has been averaging more than $9.3 billion in quarterly revenue and $3 billion in quarterly operating income. These financial averages can go higher after Sony starts operating its mobile-friendly PlayStation Now streaming video games service.

At the moment, PlayStation has over 750 video games than could only be streamed to the PC and PlayStation 4. While there are less 200 million potential customers of PlayStation Now, it could grow to more than 500 million once Sony starts streaming video games to smartphone and tablet gamers.

The Potential Economic Benefit For Microsoft

Going forward Microsoft can earn hundreds of millions of dollars in hosting/securing the servers for Sony’s cloud gaming service. Azure hosting won’t be cheap for Sony’s mobile-friendly cloud gaming service. Smartphones do not have the video card or the processor that can handle the heavy computing/rendering on PC or console-quality video games.

It makes sense for cash-rich Microsoft to be the one buying the server processors and dedicated graphics accelerator cards for cloud gaming on Azure. Microsoft can make a decent profit by renting them to future rivals of Google’s upcoming (GOOG) Stadia Cloud Gaming platform.

In other words, Microsoft is helping Sony avoid investing big money upfront by just renting Azure instances. Graphics accelerators like those used by Nvidia (NVDA) in its GeForce Now cloud gaming platform will be costly to buy and maintain (cooling + electricity costs on data center). My guesstimate is that hosting cloud gaming services for Sony and other firms can contribute $500 million to $2 billion in new annual revenue for Microsoft’s Intelligent Cloud.

Why Sony Agreed To Partner Up With Microsoft

Mobile gaming is the future of video games. As per the chart below tablet and smartphone gamers are increasingly growing larger than console and PC gamers. Based on the chart below 49% of the $148.1 billion expected revenue from video games will come from tablet and smartphone players, or $72 billion.

Google launched the Stadia Cloud Gaming platform earlier this year because it knew it can be massive hit among mobile gamers eager to try the more complex/advanced games made for the PC and consoles. My fearless forecast is that Sony actually has the best chance of becoming the no.1 cloud gaming company thanks to the help of Microsoft.

I also believe that major game developers’ bias of releasing exclusive video game titles for the PlayStation platform is Sony’s killer advantage. Microsoft accepted Sony as a partner for cloud gaming because Nadella understood that Sony really will continue to get far more exclusive video game releases than Xbox One. From this new partnership, Microsoft and Sony will likely encourage small and large game developers to do exclusive same-date launch on xCloud and PlayStation Now. These two companies can corner future big-budget/hit video games releases to the detriment of Google’s Stadia.

Becoming an early leader for cloud gaming is very important for Sony. The PlayStation ecosystem or gaming segment contributes more than 26% of the company’s revenue, or $20.7 billion/quarter. Gaming also contributes more than 34% of Sony’s net income. Sony needed Microsoft’s to make an early checkmate threat against Google Stadia.

Going forward, Microsoft is the bigger winner here. It will make money competing against PlayStation games. Microsoft will also make money from Azure hosting Sony’s upcoming cloud gaming service.

Conclusion

Making Sony, a fierce video games rival, a partner in cloud gaming is a great reason to go long on Microsoft.  These duopoly on console video games tout enough combined global clout/influence among game. Microsoft and Sony can compel long-term game developer partners to make them the top choice for new cloud gaming titles. The future of Google Stadia is therefore now less assuring. If you like investing in video games companies, Microsoft is the better long-term investment than Google. The global scale of Azure data centers and server farms can host xCloud, PlayStation Now, and other streaming games platforms.

In cloud gaming where everything is streamed online, players need nearby datacenters to deliver them lag-free gaming experience. Azure has datacenters near 54 regions. It can service cloud gaming players in 140 countries.

My buy rating for MSFT is in line with its almost-bullish one-year market trend forecast score of 83.95. I Know First’s stock-picking AI believes MSFT’s will deliver upside trend within the next 12 months.

Lastly, you bet on Microsoft’s long history of excellent profitability. Seeking Alpha gives Microsoft the highest A+ Profitability Grade. This is because Microsoft’s margins are far higher than the information technology sector’s average or median margins. Please study the chart below, MSFT really deserves a slot in your investment portfolio. Microsoft is very profitable and yet its stock still trades below 30x TTM P/E valuation.

Past I Know First Forecast Success With Microsoft

I Know First has been bullish on Microsoft’s shares in past forecasts. On February 3, 2019, the I Know First algorithm issued a bullish 3 months forecast for MSFT with a signal of 1.02 and a predictability of 0.61, the algorithm successfully forecasted the movement of the MSFT share.  Until today, MSFT shares have risen by 23.47% in line with the I Know First algorithm’s forecast. See chart below.

This bullish Microsoft stock forecast was sent to the current I Know First subscribers on February 3, 2019.

To subscribe today click here.

Please note-for trading decisions use the most recent forecast.