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Microsoft Results: Walking on Cloud

Another DOW30 component beat analyst estimates by a large margin. Microsoft surprised investors by reporting quarterly earnings-per-share of $0.76 (on an adjusted basis), well above the $0.6830 analyst consensus. The strong results were for a large part driven by its cloud division. Investors rewarded the company and its shares hit a fresh new all-time high in afterhours trading.

The company also reported better-than-expected-revenues of $22.33 billion (on an adjusted basis), well above analyst consensus of $21.71bn and above the highest estimate of $22.26bn. The higher revenues benefitted from a 116% rise in sales of Microsoft’s main cloud product, Azure. This strong increase largely offset a 2% decline of the personal computing segment, that totaled $9.3bn during the quarter. The second largest segment, Productivity and Business Processes, grew 6% to $6.7bn. A large contributor to this segment was the Office365 product, with a commercial revenue growth of 51%.

Now we’ve seen more companies that ‘beat the street ‘ during this earnings season. The thing that the market likes of Microsoft’s earnings is that the company delivers in its transition in becoming a more ‘digital’, cloud-based company. Microsoft CFO Amy Hood told investors that Azure compute usage more than doubled in the past quarter. CEO Satya Nadella said that enterprises embrace the concept of ‘digital company’, meaning that business processes are more data-driven and automated (and much more). Data processing and software is moved into the cloud, instead of localized on desktops and servers.

Microsoft was a bit late with totally embracing the internet way of doing things, relying too much on its core software products installed on many desktops in the world. But just like Amazon with AWS, the Redmond-based company fully embraces the cloud-concept. Analysts were (and may still be) somewhat worried that Microsoft can follow the strong growth of AWS, with Google also launching Cloud Services (see article on Google Cloud Project). But the latest earnings show that much of this concern is unwarranted. Microsoft transformed itself to a growth company again, and valuations doesn’t look particularly high (see table below). The company distributes an above-average dividend as well (2.4% compared to 2.1% for S&P500).

During the dotcom-craze, Microsoft was briefly the largest company in the world, measured by market capitalization. Now, being worth over $465 billion, it is catching up eternal nemesis Apple, currently leading the pack with a market capitalization of $630bn.

Disclaimer: The author has no postion in Microsoft (MSFT), nor plans to open a (long/short) position. The author uses Microsoft products and subscriptions, but has no business relationship with the company.