Microsoft Earnings Prove Enterprise Spending’s Back
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Microsoft Earnings Prove Enterprise Spending’s Back

Microsoft Corp. (Nasdaq: MSFT) reported another blowout quarter Tuesday after the close. Despite rumors about the maturity of its cloud business, sales and profitability are accelerating.

This is the part where investors begin scratching their collective heads. Azure, Microsoft’s cloud computing business, is still growing at an annualized 50% rate. Analysts, according to FactSet, expected growth to slow to 42%.

The surprise means enterprise spending is picking up again.

To be fair, there hasn’t been much weakness lately, at least not before Wednesday. Microsoft shares closed Tuesday at a $232.33. That is a record, bringing the market capitalization at $1.75 trillion, a valuation that is second only to Apple, Inc. (Nasdaq: AAPL), its one-time foe.


 

It’s noteworthy that Microsoft’s good fortunes stem from the corporate transition away from products that competed directly with Apple.

Related Post: How the Pandemic Has Reinvigorated Microsoft

Today the Redmond, Wash.-based company is a long way from the Mac vs. PC wars. Windows, its flagship operating system, is still a big business but has moved beyond walled gardens. Managers went from trying to shoehorn Windows onto smartphones, servers and networked appliances to bringing its services to platforms of all types.

Today, Microsoft Office productivity software suites live just as comfortably on Linux-based data center servers as on Android, Mac OS or iPhones and iPads. This transition helped Microsoft materially grow its business beyond Windows.

The company reported second-quarter earnings of $2.03 per share, substantially higher than the forecast of $1.64. And revenues ballooned all the way to $43.1 billion versus the expected $40.2 billion.

In a corporate press release, managers noted that overall quarterly profits rose 33% to $15.5 billion.

The biggest part of better fortunes was concentrated in the commercial cloud business segment where Q2 sales shot up to $16.7 billion, 34% better than a year ago.

The opportunity in cloud computing is a drum CEO Satya Nadella has been beating for several years. Now he claims demand for these services is accelerating as enterprises orchestrate the second phase in their digital transformations.

Related Post: Why Microsoft Has Flourished While Intel Has Failed

Nadella says Microsoft is in the best position to help companies make this transition because of its large portfolio of integrated products and services. That could all be true, yet it’s far more likely that Microsoft’s good quarter is a harbinger for the sector in general.

The across-the-board strength for the Azure, productivity and personal computing sectors — each posting double-digit growth — is a solid indication that enterprise spending is on the mend after several quarters of pandemic-induced caution.

Following Microsoft’s lead, I expect solid financial reports from Workday, Inc. (Nasdaq: WDAY), ServiceNow, Inc. (NYSE: NOW) and Appian Corp. (Nasdaq: APPN), to salesforce.com, inc. (NYSE: CRM), MongoDB, Inc. (Nasdaq: MDB) and Adobe Inc. (Nasdaq: ADBE in the weeks ahead.

The bottom line is that digital transformation projects appear to be reaccelerating. This is a full two quarters ahead of schedule.

All things being equal, the odds are companies with cloud-based enterprise software platforms are about to report terrific numbers.

Investors should use any weakness ahead to buy Microsoft and other cloud platform leaders.

Best wishes,

Jon D. Markman

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