Software-As-A-Service Competition Heats Up For Microsoft

CLSA analyst Ed Maguire said Microsoft Corporation (NASDAQ: MSFT) faces heightened competition in Software-As-A-Service (SaaS) space from salesforce.com, inc. (NYSE: CRM) and Oracle Corporation (NYSE: ORCL) as the Windows OS maker is forging partnerships with Adobe Systems Incorporated (NASDAQ: ADBE) and Workday Inc (NYSE: WDAY).

SaaS is key for Microsoft's Commercial Cloud margins while the company is betting on Artificial Intelligence to differentiate SaaS from rivals.

"We're seeing significant escalation of the competitive dynamics between Microsoft and Salesforce in the wake of a warming of relations between the two CEOs Satya Nadella and Mark Benioff," Maguire wrote in a note.

Competition

The analyst noted that competition appears to be escalating following Microsoft's successful outbidding for LinkedIn. Competitors square off in CRM and Marketing, with Salesforce is targeting a $10 billion cloud revenue run rate, and Microsoft seeking to boost its own cloud franchise with the help of its Dynamics SaaS applications.

"Dynamics CRM is the #2 CRM SaaS application in market share, but Microsoft lacks a significant franchise in marketing apps. Oracle's acquisitions of Eloqua and Responsys give it a broader marketing footprint, but Microsoft does not have a meaningful offering in this area," Maguire highlighted.

In this scenario, Microsoft's partnership with Adobe has given the much needed headstart against Salesforce as the partnership was successful in displacing Salesforce at HP, resulting in Salesforce appealing to the EU to look into the LinkedIn deal.

Higher Bids

According to the Wall Street Journal, Benioff offered higher bids to LinkedIn management even after the Microsoft deal had been announced, clearly indicating Salesforce views LinkedIn as a highly strategic asset.

"The synergies for a Salesforce/LinkedIn combination appear more straightforward than for Microsoft, but Microsoft has more scale and financial resources to bring to bear. In our view, the EU is unlikely to scuttle the deal, but what could emerge is a warning to Microsoft to keep its APIs open to Salesforce," Maguire elaborated.

On the other hand, the Workday alliance would help Microsoft counter Oracle's HCM offerings, which are the market leader.

Meanwhile, Maguire noted that Windows 10 adoption tracking well but 1 billion in 2018 seems a stretch.

"Windows is still important to Microsoft, but CEO Nadella is clearly looking to cloud and mobile apps and services as the future of the company," Maguire added.

Maguire has an Outperform rating on Microsoft, with a price target of $60.