Microsoft reports second-quarter earnings — steady and consistent defines the cloud giants stock - The Average Joe

Microsoft reports second-quarter earnings — steady and consistent defines the cloud giants stock

January 28, 2021

Fast is what we want… But steady and consistent is what you’ll get from Microsoft.

On Jan. 26, Microsoft reported strong second-quarter earnings that surpassed expectations:

  • Earnings per share of $2.03 vs. $1.64 expected.
  • Sales of $43.08b vs. $40.18b expected — an increase of 17% from the previous year.

Microsoft’s past… A cloud on the horizon

Satya Nadella took over Steve Ballmer as Microsoft’s CEO in 2014 and shifted the company’s focus toward cloud products — Microsoft’s stock has since been up over 6x.

Nadella built a $1.8t empire around cloud services and gaming and pursued aggressive acquisitions — notable purchases including Linkedin for $26.2b (2016), Github ($7.5b) in 2018 and ZeniMax ($7.5b) in 2020.

Under Nadella’s reign, Microsoft became a reliable investment that consistently grew revenue and beat earnings expectations.

In the recent quarter, Microsoft’s fastest-growing units were…

  • Azure (cloud unit) — 50% growth
  • Xbox content and cloud services – 40% growth
  • Server products and cloud services — 26% growth

With the exception of Xbox sales, which saw an increase from the release of the new Xbox X console, Microsoft’s cloud units drove the majority of its growth.

Microsoft’s future… Is still looking very cloudy

As Nadella predicted, the cloud played a critical role in Microsoft’s future. According to market analyst firm, Canalys, 3 firms controlled 58% of the $100b+ cloud infrastructure market in the third quarter of 2020:

  • Amazon Web Services (32% market share)
  • Microsoft Azure (19% market share)
  • Google Cloud (7% market share)

Had Nadella not shifted Microsoft’s focus towards the cloud, Microsoft would have missed out on a massive opportunity.

For investors… What could possibly slow Microsoft down?

In 2020, Microsoft’s cloud business received a boost from COVID work-from-home trends that increased the demand for cloud products.

Facing increased competition and market saturation, Microsoft’s cloud units have seen their growth slow over the past 3 years. Azure’s growth fell from 93% at the end of 2018 to 50% in 2020 and other cloud units saw similar declines.

Despite slower growth, Microsoft holds over $131b in cash which could be used to fuel growth with more acquisitions, or return value to shareholders through share buybacks or dividends.