(Veteran columnist Jon D. Markman publishes Strategic Advantage, a daily guide to investing in life-changing tech stocks. For a free trial, text TECH to 206-279-1385.)
The Redmond, Wash.-based software giant reported Tuesday that third quarter revenues were the strongest since 2018, negating the narrative that tech spending is slowing.
Investors should use weakness to add longer-term positions.
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. This is a monster trend that accelerated during COVID-19, yet it is far from complete.
Microsoft is in peak form because years ago, managers made the choice 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, managers were ready. Making the sale to C-suite chief technology officers was easy.
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 was right in Microsoft’s wheelhouse.
The oddity is investment analysts immediately assumed business could not possible get any better. The results Tuesday illustrate the folly in that argument. Redmond 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 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.
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.
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 projects done. Taking a shot with smaller companies is not on the table at this point. The risk is too great.
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 the share price.
Shares did trend lower in after-hours trade, 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 competition.
Based on cash flow alone Microsoft shares should trade to $390 in 18 months, a 50% gain from Tuesday’s close. Buy the stock into all weakness.