Markman Capital Insight

Microsoft On Cloud 9 After Smashing Expectations

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It’s the biggest tech company that nobody ever talks about, and business is booming.

MicrosoftMSFT (MSFT) on Tuesday reported surprisingly strong financial results on the continued growth in cloud computing and its Office 365 corporate subscription revenue.

The Redmond, Wash.-based software giant has a stranglehold on business customers.

Most of big tech is under attack from politicians, regulators and smaller, nimbler tech companies. Meta Platforms (FB), (AMZN), Alphabet (GOOGL), AppleAAPL (AAPL) and even NetflixNFLX (NFLX) can’t seem to catch a break. Some constituency is always complaining that the platforms is too big, too anticompetitive.  

Oddly, none of those slings and arrows seem to pierce Microsoft. The company goes about its business, getting bigger and more dominant, quarter after quarter.

The heart of the empire is Microsoft’s two corporate facing cloud businesses. Azure is a computing platform that allows companies to manage workflows, store data and run the complex digital software suites that have become so important to growth strategies. Sales at Azure ballooned to $19 billion, up 26% year-over-year. Office 365 is the cloud-based, subscription version of the popular Microsoft Office productivity suite. That segment had sales of $15.8 billion, up 17% versus a year ago.

The traditional personal computing business should not be overlooked, though. The old school Windows operating system, Surface computers, Xbox and the advertising businesses had sales of $14.5 billion, up 11% from a year ago.

The complete Microsoft package was good for first quarter revenues of $49.4 billion, up 18%. Profits rose 8% to $16.7 billion. Microsoft shares traded 6% higher early Wednesday after the results.

The annualized sales rate at Microsoft is now nearly $200 billion, with about one-third in profits. And there has barely been a peep about uncompetitive practices or the need for greater regulation. Sataya Nadella, chief executive officer announced last August that Office 365 subscription prices would rise across the board. Crickets.

The secret at Microsoft seems to be about clientele.

It makes sense for chief financial officers run their productivity software in the cloud. And it doesn’t hurt that Word, Excel and PowerPoint have become the industry standards. Bundling productivity licenses with fees for Azure corporate cloud services is a non-brainer. It’s cheaper. Plus, getting everything from one vendor is easier than chasing a bunch of competing services elsewhere. 

It has been a bit of a rough ride in 2022 for Microsoft shares. As of the close on Tuesday the stock was down 19.7%, putting it well below all of the key moving averages. The business is clearly strong and growing rapidly, yet that does not always assure higher share prices.

Investors are currently worried about higher interest rates and what impact increased borrowing costs will have on future corporate profitability. This has been especially pronounced in the tech sector where many companies are not yet profitable.

Earnings power is not a concern at Microsoft. The company has demonstrated amazing growth during the past two decades. The business is quietly getting bigger, without much scrutiny. That is a good thing.

At a price of $270.22, Microsoft trades at 25x forward earnings and 11.4x sales. The company has profit margins of 38.5%.

Given the state of the current stock market, investors should consider buying the shares only after Microsoft stock moves above the key moving averages on a closing basis. Currently, that would mean waiting for a rally above $295.