Microsoft Shows Leadership in Pandemic

Jon Markman

It’s now clear for all to see that Microsoft was a huge winner in the pandemic.

Microsoft reported earnings after the close Wednesday. They were spectacular, yet again. The surprise, for anyone who wasn’t paying attention, was how little the business is being impacted by the COVID-19 pandemic.

According to a corporate press release, fourth-quarter revenues surged to $38 billion, a 13% increase year-over-year. Sales from its Azure cloud business ramped up 47%. Overall, the company reported $11.2 billion in profits.

It turns out working from home is a boon for companies that provide IT infrastructure.

The good news for you as an investor is that this monster trend is only getting started.

The Redmond, Wash.-based software giant is in peak form because years ago managers decided to begin moving customers and its own infrastructure to the cloud. That meant all the heavy lifting, the processing and storing of data was running in robust data centers all over the world. When most of the world shuttered due to COVID-19, Microsoft was ready.

Satya Nadella, chief executive officer, 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 is right in Microsoft’s wheelhouse.

The results today show Redmond is continuing to smash it out of the park.

The Productivity and Business Processes division generated $11.8 billion in sales during the quarter, up 6% from the same period last year. Given the macroeconomic state of the world, with plunging GDP and record unemployment, that’s an impressive development.

But the kicker is that digital transformation is only in the early innings.

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.

And Microsoft is winning more than its fair share of that marketplace. Revenues at its Intelligence Cloud division increased to $13.4 billion, up 17% from a year ago. That division is also home to Azure.

Going forward 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 things done. Taking a shot with smaller companies is not on the table at this point. The risk is too great.

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

To be sure, all of the big cloud infrastructure providers have performed well this year. Microsoft shares are up 34.3%. Even though the company now has a market capitalization in excess of nearly $1.6 trillion, the potential of its business is still not being reflected in the share price.

Think about this: only two months ago, the current scale of the work-from-home movement was unimaginable. On-site servers would have been overwhelmed by the demand.

Azure servers didn’t miss a beat. They kept pace with the transition. The infrastructure was built to take advantage of rapid changes in client business models. Now shareholders are beginning to see some of the fruits of Microsoft’s investment playout in corporate statements.

Microsoft shares are called 2.7% lower in after-hours trade. Buy the stock on pullbacks as the digital transformation narrative, and the profitability it implies, is still in the early innings.