Microsoft Corporation (MSFT) Is a Cloud-Powered Winner

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MSFT - Microsoft Corporation (MSFT) Is a Cloud-Powered Winner

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CEO Satya Nadella has transformed Microsoft Corporation (NASDAQ:MSFT) from a company that was primarily about client devices into a company that is based on cloud and cloud applications. Wall Street and Microsoft stock owners wanted him to deliver on that promise in the form of earnings gains in the third quarter.

Microsoft Corporation (MSFT) Is a Cloud-Powered Winner

The consensus among analysts going into the September quarter’s earnings was that the company would earn 68 cents per share, up 2% on flat revenues of $21.54 billion.

The “whisper number” was for 72 cents per share of earnings. MSFT was expected to bring in $6.8 billion of that revenue from the Azure cloud, and that was the number most felt would move Microsoft stock.

As it was, they need not have worried. The company announced non-GAAP net income of $6 billion, 76 cents per share, on revenues of $22.3 billion. The headline, however, was what MSFT called “Intelligent Cloud” revenues of $6.4 billion, with Azure itself up 116%, on which it claimed gross margins of 49%.

In short, growth in cloud more than offset the flattening of Windows revenue, and lost Windows profits. The dividend was raised to 39 cents from 36.

The news sent Microsoft stock up over $60 per share in after-hours trading, a record high.

What’s Next for MSFT?

The success of Nadella’s cloud strategy will reassure investors in the near-term, but all technology investors want to know what a company is going to do for it next.

Nadella is due to give answers quickly, having announced press events for Oct. 26, and for the following Wednesday, Nov. 2. The first conference is being called a Windows 10 event, but with cloud now built-out and the traditional Windows niche mature, MSFT has also become a client hardware company, more like Apple Inc. (NASDAQ:AAPL) than Bill Gates’ company ever dreamt of being.

The Microsoft Surface laptop, so hated by New England Patriots coach Bill Belichick, is thus due to get a refresh and prices have already been slashed to get rid of inventory.

In some ways, of course, MSFT has been a hardware company for many years, thanks to its Xbox gaming platform, introduced in 2001. Microsoft is now saying in advertising that the mission of market leadership is accomplished. This means it is not only delivering game hardware, and increasingly games, but hardware add-ons like its Virtual Reality headset, the HoloLens, following the same strategy Sony Corp (ADR) (NYSE:SNE) used to make its own headset a success, tied to its PlayStation.

Bottom Line on Microsoft Stock

One thing MSFT is doing next is a refresh of Office, now called Office 365 and delivered online. The company has scheduled a press event for Nov. 2 and is expected to roll out new capabilities in speech recognition, which is expected to become the operating interface of the coming decade. The Nov. 2 event may also deliver some news on LinkedIn Corp (NYSE:LNKD), which Microsoft is in the process of acquiring for $26.2 billion.

MSFT has built three facilities called reactors, which aim to catch ideas from university researchers and entrepreneurs quickly and bring them to market. How it gets value from the reactors is unclear, just as it’s unclear what benefits it gets from its Microsoft Stores, which are empty embarrassments in malls across America. Nadella learned how to cut his losses by writing off Nokia Corp (ADR) (NYSE:NOK) and is continuing that by eliminating the Microsoft Band, a wearable that competed unsuccessfully with Fitbit Inc (NYSE:FIT).

Nadella has plenty of cash to go in whatever direction Nadella chooses. It had over $113 billion in cash and short-term investments on its book as of June, and September’s success just added to the pile.

Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time.  Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in MSFT and AAPL.

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Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2016/10/microsoft-corporation-msft-cloud-powered-winner/.

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