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Microsoft CEO Satya Nadella. Photograph by Richard Morgenstein — Microsoft

Microsoft’s increasingly cloudy future is good news to investors

Oct 22, 2015

Microsoft’s growing cloud business is seeing a whole lot of sunshine.

The company’s cloud unit, which includes its Windows Server operating system, database services, and Azure cloud-computing platform, had $5.9 billion in sales in the company's latest quarter. That's an 8% gain over the $5.5 billion during the same period last year.

The Azure cloud-computing platform, for customers that want to buy computing resources on demand from Microsoft’s data centers, more than doubled its sales year-over-year to an annual run rate of $8.2 billion, Microsoft CEO Satya Nadella said during an earnings call. Based on the strong momentum, he ambitiously predicted that the company would reach $20 billion in annual cloud sales by 2018.

Investors, buoyed by Nadella's optimism and an otherwise strong quarter, sent Microsoft's shares up 7.9% in after-hours trading.

But Microsoft (msft) wasn’t the only company on Thursday that had cheery news about its cloud business. Amazon’s cloud-computing arm, Amazon Web Services, which analysts say is the market leader when it comes to delivering computing resources to customers, also showed strong growth. Amazon (amzn) said that that it accounted for $2.1 billion in quarterly sales, a whopping 78% jump from the $1.2 billion in the same period a year earlier.

Nadella acknowledged the e-commerce giant during the earnings call by claiming that there are “really only two” cloud computing companies that businesses want to use. “We push each other, and we each have a unique approach,” he said.

Of course, Nadella conspicuously left out a few other rivals like Google (goog) and IBM (ibm). They would certainly disagree with the idea that they are outside the top tier in the cloud club.

In any case, Nadella said Microsoft would continue to invest heavily in its cloud business, citing the recent opening of three new data centers in India as examples. In October, IBM (ibm) also opened a cloud data center in India while Amazon plans to open one in 2016.

“To be a worldwide cloud player, global scale is a must,” Nadella said.

Microsoft has been betting on its cloud business to offset the declines in its personal computing business, which includes Windows, phones, and the Surface tablet. That business unit took in $9.4 billion in the first quarter, a 17% decline from $11.2 billion in the previous year.

That’s a hefty drop, but investors are feeling some new optimism about Microsoft’s future. If the trend of more companies moving their infrastructure to cloud data centers continues, Microsoft could benefit. But, of course, Amazon could too.

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