October 26, 2018
Microsoft’s major investment in the cloud is beginning to pay off. In the last several quarters, this sector has grown so fast that the company’s market cap has soared to about $785 billion. Now, Microsoft reported that the results of its latest quarter have exceeded analyst expectations. When Satya Nadella became chief executive, Microsoft’s revenue largely came from marketing its Windows operating system on personal computers. Nadella turned the company towards cloud computing, with Azure as its core offering.
The New York Times reports that, “Microsoft’s first-quarter revenue was up 19 percent over the previous year, to $29.1 billion … [and] net income rose 34 percent, to $8.8 billion.” “We are seeing larger and longer-term customer commitments to the cloud,” said Microsoft chief financial officer Amy Hood.
Wedbush Securities managing director Dan Ives noted that, “if you told an investor a few years ago that Microsoft is on the cusp of a $1 trillion market capitalization and could surpass Amazon, they’d think you were crazy.”
“It speaks to how significant this cloud shift is, and what a strong hold Microsoft has on the cloud,” he added.
Amazon pioneered cloud computing, but Microsoft is catching up, even as “the breakneck growth of Azure, Microsoft’s core cloud offering, slowed more in the most recent quarter,” up 76 percent after several quarters of 85 to 98 percent. Deutsche Bank analyst Karl Keirstead said that Azure may not even be profitable, but “analysts and investors say the company is well positioned” for the “hybrid cloud,” whereby companies split their storage between the cloud and on-premise servers.
“Microsoft is unique in the sense that it has the ability to play in both environments,” said Becker Capital portfolio manager Sid Parakh. “Legacy customers are already working on Microsoft products, and it provides a level of continuity to transition to the cloud.” Nadella stated that Microsoft is investing in “building out its hybrid offerings.”
Hood reports that Microsoft’s “year-over-year growth in server products and cloud services was 28 percent,” which signals that the company is “meeting customer demand.” It also has resources to spend on the cloud since its Windows business is still lucrative. “They have been telegraphing that Azure’s profitability is improving, and that is enough,” said Keirstead. “It is probably the most amazing growth engine we have seen inside Microsoft since basically the origins of the Windows business.”
Microsoft has also moved its Windows Office suite into the cloud with Office 365, whose revenue was up 36 percent in Q1. Morgan Stanley analyst Keith Weiss calls this move “really important” since it “drives a lot of your profit.”
Hood also reported that gaming revenue increased 44 percent, with “Fortnite” a “key component.” LinkedIn revenue is also up 33 percent over the previous year, with “higher-than-expected revenue.”