Microsoft Makes It Rain in the Cloud

Microsoft Makes It Rain in the Cloud

It’s time to stop doubting Microsoft Corp. (Nasdaq: MSFT). Its business plan is a winner, and the stock is headed much higher over the intermediate term.

The Redmond, Washington-based software giant reported Tuesday that third-quarter revenues were the strongest since 2018, negating the narrative that tech spending is slowing.

According to a corporate press release, third-quarter revenues surged to $41.7 billion, a 19% increase year over year. Sales from its Azure cloud business ramped up 50% over the same time frame. The company reported $17 billion in profits, up a staggering 31% versus a year ago.

It turns out that the rush to connect the enterprise world to hyperscale computing networks is not topping out. Digital transformation is alive and well.

Investors shouldn’t be surprised by this. This is a monster trend that accelerated during the pandemic, yet it is far from complete.

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Microsoft is in peak form because years ago, managers made a choice to begin moving customers and the company’s own infrastructure to the cloud. That meant all the heavy lifting, processing and storing of data was running in robust data centers all over the world. When most of the world shuttered and many businesses went to remote work, managers were ready. Making the sale to C-suite chief technology officers was easy.

CEO Satya Nadella said in April that two full years of digital transformation occurred in only two months during the pandemic. Work from home initiatives forced enterprises to accelerate migration to cloud-based infrastructure. Getting employees online and securing their data was right in Microsoft’s wheelhouse.

The oddity is investment analysts immediately assumed business could not possibly get any better. The results on Tuesday illustrate the folly in that argument. Microsoft is continuing to smash it out of the park, and the best is yet to come.

The Commercial Cloud division generated $17.7 billion in sales during the quarter, up 33% from the same period last year. That’s certainly an impressive development, yet the really good news is buried deep within the numbers. This is a purely subscription-based business with recurring revenues. As enterprises build more of their workflows into the cloud, sales are likely to grow even faster.

Nadella promised Tuesday that Microsoft will make that process easier by innovating across every layer of its tech stack. During the quarter, the company logged $5.1 billion of capital expenditures.

Looking beyond the pandemic, the company is in a great position. Scale is an important competitive advantage in the brave new digital world. Enterprises want expertise and innovation, but they also want to be certain their technology partners have the wherewithal to get the big projects done. Taking a shot with smaller companies is not on the table at this point. The risk is too great.

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This undoubtedly plays into the strengths of, Inc. (Nasdaq: AMZN), Alphabet Inc. (Nasdaq: GOOGL) and Microsoft … and it’s an advantage that is not going to change any time soon.

Statista, an online analytics aggregator, finds that analysts project the total addressable market for digital transformation strategies to reach $1.9 trillion by 2022, up from $1.2 trillion in 2019.

To be sure, Microsoft shares have performed well in 2021, rising 18%. The company now has a market capitalization in excess of $1.9 trillion, yet the potential of its business is still not being reflected in its share price.


Shares did trend lower in after-hours trading, falling 2.4% to $255.60. The story is some traders were concerned about the rate of growth at Azure, the pure enterprise cloud-computing business. They’re missing the point — almost completely. Azure, bundled with Office and other Microsoft products, is extremely compelling to enterprise customers. This process also inoculates Azure from the competition.

Savvy investors should strongly consider buying the stock into weakness.

Best wishes,

Jon D. Markman

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said elkhamrichi April 30, 2021