Microsoft (MSFT, Financial) turned in another stellar quarter last Thursday, reporting earnings of $1.12 per on revenue of $29.08 billion, a 19% increase. Analysts had expected 96 cents a share on $27.92 billion in revenue. Net income increased 34% to $8.82 billion. The company’s rapidly growing Azure cloud-computing business grew by 76%. A surprise component in the overall revenue growth picture was Microsoft’s gaming business, where sales jumped 44%.
The latest results could enhance Microsoft’s quest to surpass FAANG rival Amazon (AMZN, Financial) for the top spot in market capitalization. As a measure of its phenomenal and heady growth rates in its cloud server business, for the last 20 quarters, Microsoft has beaten analysts’ revenue estimates 19 times. Thursday’s numbers did not deviate from this impressive trend.
Those who expressed some measure of dissatisfaction because the 76% rate of growth represented a “slowdown” in the rate of acceleration for the cloud server business should be mindful that many Standard and Poor's 500 index companies as well as members of the FAANG group would be delighted to have such “decelerating” growth rates for their core businesses. Additionally, cloud computing leader and principal Microsoft competitor Amazon’s AWS unit increased only 49%.
Microsoft has developed an ancillary component of its Azure cloud services business that operates by enticing existing customers who already run the company’s software in their own data centers to additionally use Microsoft’s cloud services as an overall complement for their database needs. This hybrid strategy paid off with a 28% increase in Microsoft’s server products as well as revenue from its cloud services unit.
The latest successful earnings report continued a path that the company has followed since 2012, under the tutelage of CEO Satya Nadella.
Nadella made it clear in 2013 that the company’s strategic business model anticipated that cloud networking services would drive most of the corporation’s growth. Since 2013, the price of Microsoft has nearly tripled, from approximated $27 in January of 2013 to its closing price of $107 on Friday. Microsoft’s share price has climbed 19% in 2018, compared to the 3% rise in the S&P 500.
Even though its once-dominant Office suite of software products as well as its Windows OS no longer are the company’s bread and butter revenue leaders, the company has adopted a prudent and successful strategy of continuing to squeeze revenue out of these stable software and PC products. Revenue in Microsoft’s PC-related business including Xbox rose 15% to $10.75 billion. The Office productivity suite grew a respectable 19% to $9.77 billion. These are remarkable numbers for a company whose lodestar product many analysts believed was in its death throes.
Growth in Microsoft’s cloud services is also facilitated by the existence of a large, untapped market comprised of many small- to medium-sized retailers who are now using Amazon’s AWS services. These companies realized there is no reason to continue to line the pockets of a company that is driving many of them out of business, especially when there is another cloud service provider available.
Indeed, a recent Goldman Sachs poll revealed that Microsoft is tied with Amazon’s AWS division in terms of which cloud computing provider chief information officers anticipate using three years from now. Amazon retail competitor Walmart (WMT, Financial) recently agreed to use Microsoft’s cloud services technology to streamline its business operations and to develop purchasing and sales data sharing capabilities with its third-party vendors.
Given its consistent and accelerated revenue growth, Microsoft is on target to surpass Amazon and enter the exclusive $1 trillion market cap club. At Friday’s closing price of $107, Microsoft’s market cap is approximately $822 billion. After an 8% decline following a disappointing quarter for sales, Amazon’s stock closed on Friday at $1,642 with a market cap of $801.2 billion.
Amazon would need to hit $2,045 per share for the company to once again reach the much-coveted $1 trillion club, currently occupied by Apple (AAPL, Financial). There are many security analysts, however, who are still betting that Amazon’s shares will exceed the $2,000 level. After its latest earnings report, 40 analysts tracking the company had an average price of $2,183.67 for the stock.
Given Microsoft’s unbroken record of consistently generating revenue and earnings per share that far exceed analysts’ expectations, the price projections for Amazon’s stock necessary for it to attain trillion-dollar capitalization status may prove to be overly optimistic. Microsoft will continue to nip at its cloud services competitor’s heels.
Disclosure: I have no position in any of the securities referenced in this article.
