Why Microsoft's profit boom is just beginning, according to Credit Suisse

Key Points
  • Credit Suisse initiates at Microsoft at outperform with $80 price target
  • Microsoft reports quarterly earnings after the bell: Analysts expect total revenue of $23.62 billion, according to a Thomson Reuters consensus estimate
  • Nearly $6.6 billion of that revenue is expected to come from "intelligent cloud," according to FactSet
Satya Nadella speaking at the 2016 World Economic Forum in Davos, Switzerland.
David A. Grogan | CNBC

Microsoft's cloud business is likely to unlock a powerful profit stream for the business over the next few years, according to analyst Michael Nemeroff.

Nemeroff, a banker at Credit Suisse, wrote that Microsoft is in the early innings of its commercial cloud business, while Office 365 also has the potential for revenue and profit growth.

He wrote that he expects Microsoft's cloud to continue growing at a pace of more than 50 percent revenue growth until 2018, and over 30 percent revenue growth through 2019. Profit margins are expected to grow to 60 percent by 2019, Nemeroff estimated.

Microsoft's cloud services, Azure, currently leads the market, beat only by Amazon's Web Services as far as revenue. But Microsoft is closing that gap, he wrote, setting it up for " significant earnings power potential over the next few years."

Microsoft has some advantages, Nemeroff said: It meets high standards as far as government and industry regulations, and is available in 34 regions, more than other cloud providers. He set a target price of $80 a share for the stock, higher than the $70.55 average listed in FactSet.

The research comes ahead of Microsoft's earnings report on Thursday after the bell, when analysts polled by Thomson Reuters expect the company to report total revenue of $23.62 billion. Nearly $6.6 billion of that revenue is expected to come from "intelligent cloud," according to FactSet.

Anand Eswaran, Microsoft's corporate vice president of services, told CNBC this week that Microsoft thinks about cloud differently than others in the industry, focusing on a complete pipeline that connects consumer products to businesses. For instance, he said, in collecting cloud data for a connected driving partnership with India's Tata Motors, Microsoft's salesforce found they were having trouble getting interest from millennials. As a result, they were able to incorporate Tata's brand into XBox games — something Eswaran said no other company could have done.

Salesforce is another "colossus of the cloud," Nemeroff wrote. The enterprise technology company is likely to gain share across multiple areas of the cloud business, according to Credit Suisse, thanks to cross-selling opportunities and keeping costs down.