Big tech is under pressure from lawmakers but Microsoft ( (MSFT) - Get Microsoft Corporation Report), the third biggest tech company by market capitalization, is sailing beneath the radar. It’s the ultimate all-arounder.
The Redmond, Wash.-based software giant, Tuesday reported first quarter sales of $37.2 billion on solid gains in its cloud, computer, video game and productivity software businesses.
Microsoft is quietly dominating, and regulators are none the wiser.
It’s difficult to pull off.
Azure, its cloud unit is growing as fast as any major technology infrastructure business in United States. The company’s advantage over competitors, Amazon Web Services and Google Cloud, is longstanding relationships with enterprises customers, and the rapid buildout of its hybrid cloud, a combination of its data centers and servers on premises with enterprise customers.
Hybrid cloud is the fastest growing part of the cloud infrastructure segment. Flexera, a cloud industry blog, notes that 87% of companies now have a hybrid cloud strategy.
Microsoft Surface, a line of state-of-the-art computers, caught the industry completely off guard with flashy design and a fresh approach to getting work done. Surface Studio 2 is the ultimate workstation with a gorgeous big bright screen, a clever stainless steel CPU box with an integrated hinge.
Xbox has been a game console kingpin since 2001. The latest generation brings updated specifications and the commitment of product managers to develop even more best-in-class games.
And Office, the company’s productivity software suite, is the de facto standard among enterprises. Managers in 2014 decided to push the entire suite online and through subscriptions. Now that business, once confined to millions of shrink wrapped cardboard boxes, is a $37 billion business, and growing fast.
It’s a wonder how Microsoft executives have been able to keep all of this goodness under one big corporate umbrella, while sidestepping regulators and opportunistic politicos.
The secret is to stay out of the spotlight.
It seems so simple, but Apple ( (AAPL) - Get Apple Inc. Report) and Alphabet ( (GOOGL) - Get Alphabet Inc. Class A Report), the parent company of Google, can’t do it. The same is true of Amazon.com ( (AMZN) - Get Amazon.com, Inc. Report) and Facebook ( (FB) - Get Meta Platforms Inc. Class A Report).
Each of these tech heavyweights have caught the eye of regulators. They don’t like the way these dominant businesses use their platforms to stifle competition. There is a bit of truth to it all, according to a Sept. 2019 New York Times story.
Apple and Amazon routinely abuse their role as platform gatekeepers by competing with vendors, and changing a fat sales commission, too. Google and Facebook are so dominant in search and social media that managers are in often in a position to make up the rules as they see fit. It shouldn’t be a surprise those edicts benefit Google and Facebook.
In fairness, Microsoft does exactly the same thing. One of the highlights of the first quarter was the rapid ascendant of Teams, videoconferencing software that competes directly with Zoom Video ( (ZM) - Get Zoom Video Communications, Inc. Class A Report) and Slack ( (WORK) - Get Slack Technologies, Inc. Class A Report).
Satya Nadella, chief executive officer, said Teams now has 115 million daily active users, up 50% from only six months ago. That shocking growth is one part work-from-home, and another bigger part seamless integration into Office. Growing users is always easier when you’re the gatekeeper to a dominant platform.
Now all of those vessels are setting sail. According to the SEC filing, Sales grew to $37.2 billion during the quarter, up 12% year-over-year. Intelligent Cloud, that includes Azure, had revenues of $13 billion, up 20%. Productivity accounted for $12.3 billion, up 11%. Personal Computing, which incorporates Xbox and Surface, was an $11.8 billion business, rising 6%.
Better still, profits hit $13.9 billion, up 30%.
Microsoft is a wonderful business. It’s extremely profitable and in all of the correct business segments to dominate in the future as more businesses move workflows to the cloud and video gameplay and home computing becomes more prevalent.
Bearish investors often warn that shares are simply too expensive, trading at 29x forward earnings and 11.2x sales. They point to the past when shares traded at far lower multiples. This analysis misses the point. Growth was slower, and the prospects were not nearly as bright.
It’s doubtful that the stock is going to have a major near term decline, but investors should buy shares if that happens. Microsoft stock should trade to $290 during the next 12 months, a gain of 36% from current levels.