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

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.