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Alex Kimani

Alex Kimani

Writer, Safehaven.com

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Microsoft Sets Sights On Trillion-Dollar Valuation

Dollar

The world’s largest software and cloud company, Microsoft Corp. (NASDAQ: MSFT) is rapidly closing in on the rarefied $1-trillion club after the company beat Wall Street’s earnings expectations in style.

Microsoft’s FY 19 third-quarter results showed that revenue was up 14 percent to $30.6B thanks to Cloud growth topping estimates and Windows shaking off the Intel Corp. (NASDAQ:INTC) chip scare.

Overall, it’s been a remarkable quarter for the software giant: operating income was up to $10.3 billion (a 25-percent increase), net income up to $8.8 billion (19 percent), and earnings-per-share at $1.14 (up 20 percent).

Healthy growth

The biggest news here is Microsoft’s Cloud Business, which once again displayed exceptional strength.

Microsoft still refuses to give a hard dollar-figure for Azure, but what it did divulge did not disappoint. Intelligent Cloud expanded 24 percent to $9.7B (32 percent of total) with Azure beating estimates after growing 75 percent.  Commercial Cloud was up to $9.7B, an impressive 41 percent increase.

Productivity and Business Processes Office consumer products including Office 365 reported revenue of $10.2 billion, an increase of 14 percent. Microsoft reported that Office 365 subscribers—another closely watched metric—increased 12 percent to 34.2 million.

Even Microsoft’s legacy PC business--a perennial laggard—managed to post positive growth with the More Personal Computing segment up 8 percent to $10.7 billion. Windows OEM revenue expanded 15 percent, something the company attributed to pent-up demand from the previous quarter being met by greater availability of Intel processors. Surface revenue expanded 21 percent to $1.3B while overall gaming revenue(including Xbox sales) was up 5 percent to $2.4B.

Successful cloud transition

Indeed, all of Microsoft’s three major revenue segments exceeded Wall Street’s expectations: Intelligent Cloud, $9.65B (consensus: $9.3B); Productivity and Business, $10.24B (consensus: $10B) and More Personal Computing, $10.68B (consensus: $10.5B).

However, that did not detract from an even more important fact: Microsoft, once left for dead after largely missing out on the mobile era—is not only surviving in the post-PC era but also thriving.

A few years back, Microsoft took the tough decision to wean users off its old model of selling on-premise licenses to a cloud subscription model and adopted the Cloud First, Mobile First rallying cry. As expected, the transition to delivering software as internet service was not easy, and the company had to endure a dry period as it expanded its user base.

But now that seems to be paying off, and it’s all coming together for the company.

Microsoft has now delivered six consecutive quarters of double-digit top-line growth, with a steadily rising share of recurring revenue from cloud subscriptions (32 percent last quarter). Credit Suisse analyst, Michael Nemeroff, estimates Microsoft’s cloud revenue could exceed 50 percent of total revenues in four years.

(Click to enlarge)

Source: Seeking Alpha

Investors are pleased with the company and are willing to reward Microsoft with a higher PE multiple despite the fact that it’s not exactly a sexy cloud upstart. Perhaps that’s got something to do with the fact that Microsoft's revenue streams today are far more diverse than either Google Inc.’s(NASDAQ:GOOG) or Apple Inc.‘s(NASDAQ :AAPL), both being Wall Street darlings themselves.

Consequently, MSFT shares have easily outpaced the market, with a 3-year gain of 160 percent vs. 42 percent for the S&P 500 and YTD rally of 27.8 percent compared to 17 percent for the market benchmark.

(Click to enlarge)

By Alex Kimani for Safehaven.com

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