Demand For Data Center Space Is Increasing And Microsoft Corporation (MSFT) Leads


The moment Satya Nadella took over the reins of the CEO position in Microsoft Corporation (NASDAQ:MSFT) he indicated the focus would be ‘mobile first and cloud first’. True to the statement, the company has been focusing on both segments. However, it was the cloud that is driving its revenue higher in the last few quarters. In fact, it was the cloud that brought back the investors and analysts to the counter. The software firm has been one of the few top firms to continue to gain traction in the cloud computing module. The company has launched some of the apps specifically for the cloud computing. Data center is one such area that is witnessing strong growth. The sector is one of the rapidly growing spaces in the current year. The software firm is leading the table currently.

Demand For Data Center Grows

Currently, data centers are available for both leases, as well as, outsource. Both has advantages and disadvantages. Microsoft Corporation (NASDAQ:MSFT) preferred the route of leasing to expand its presence in the data center. The advantage of leasing a data center, which is also known as Co-location, is that it presents a model of more predictable expenditures. That meant costs increase consistently during the data center life. Forrester, a researcher firm, indicated that there were only a few upfront costs as most of the costs were of operational nature and not capital. Therefore, the management has control over the expenses.

Another advantage of the data center was the flexibility of adding capacity whenever need. Also, there was no waste in build outs or additional capacity. Purchasing power enables more accessibility to space, as well as, the power. The most important factor is that data centers were run by certified, as well as, experienced professionals providing their expertise with high availability and efficiency. Microsoft Corporation (NASDAQ:MSFT) has been promoting the advantages of data centers to gain significant orders. The company was keen to strike lease deals so that it was fully equipped to meet the growing demand.

Leads The Data Center Lease

It was a well-known fact that there was a strong demand for data centers, and most of them were leased by cloud computing service providers, as well as, companies offering other web services. North American Data Center’s managing principal, Jim Kerrigan, said that it was the data center providers that did a good business last year. Cloud was the major factor in the last year also for one of the best data center leasing years. He pointed out that 40% of the leasing deals were with cloud-based firms.

Significantly, Microsoft Corporation (NASDAQ:MSFT) led the space with leasing agreement for close to 30 MW of capacity in three sites. The software firm’s three Data Centers included a 10.4MW agreement with DuPont Fabros Technology in Virginia. Similarly, it stuck an agreement with Vantage Data Centers for 10MW in California. The third leased center has 7.2MW and situated in Illinois. The company struck a deal with Digital Realty Trust. The competition also plays a part as Amazon.com, Inc. (NASDAQ:AMZN)’s Amazon Web Services has contracted a big 130,000 square foot Data Center in the Silicon Valley.

Market Size

One of the focus areas for Microsoft Corporation (NASDAQ:MSFT) might be Software-Defined Data Center (SDDC) market by solution. The company is set to take advantage of the rapidly growth space in the next five years. The SDDC market generated revenue of $21.78 billion in the year 2015. According to a research firm, this is set to witness 28.8% compound annual growth rate until the year 2020. That meant the software firm could try to earn as much possible from $77.18 billion by the end of the decade, i.e. the year 2020.

As a region-wise, North America was said to be holding the biggest share in SDDC market and the APAC region follows it. But the European market could be a game changer as the region is predicted to witness CAGR of 39.6% in the five-year period between 2014 and 2019.

Azure’s Ascendency

Another key platform for cloud for Microsoft Corporation (NASDAQ:MSFT) is its Azure. Of late, several analysts are betting on the software firm’s Azure capabilities in meeting the customer’s needs. Though Amazon.com, Inc. (NASDAQ:AMZN)’s AWS is a leading in the position, a number of analysts see the company facing some headwinds. On top of this, the Windows OS provider slashed its prices by 10 – 17% most recently on some of the Azure servers. That included Dv2 series that was said to have been priced high because of the faster processing unit. The company took the online retailer’s 5% discount in its Linux EC2 server and responded with an increased price cut to attract customers. Of course, both the product profiles were different.

Therefore, some analysts believe that it was not a price war since the two companies products were focused on different segments. Though Deutsche Bank trimmed its EPS estimations, as well as, gross margin for Microsoft Corporation (NASDAQ:MSFT), it reaffirmed its rating of Buy on the company’s shares ahead of the second quarter results. The brokerage also believes that the stock is undervalued and kept a price objective of $65. Deutsche Bank said that the price cuts were meant for enterprise grade apps, as well as, the products. The software firm is trying to add sales by offering a price discount to its existing customers. The company has been successful in pushing its products to ensure Azure success until now.

Conclusion

Microsoft Corporation (NASDAQ:MSFT)’s focus on cloud computing is yielding solid results. Data centers and Azure are two products that generated a lot of interest in the businesses. Aside from that, the company stands to gain from other key factors such as increased adoption rate of Windows 10 OS, Surface tablet, HoloLens, Cortana, and so on. Therefore, the company is poised to provide solid returns to its investors.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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