For a brief moment, and we are talking just a few months, Microsoft (NASDAQ: MSFT) lost title of “second most valuable company” to Amazon (NASDAQ: AMZN). That changed when Amazon fell to $1500 a share. Microsoft stock had a strong quarter, and the company regained the title. Since the market’s rebound, Microsoft and Amazon.com now have virtually the same market capitalization.
Realistically, though, the company with the bigger market cap will shift back and forth for the foreseeable future. What matters is what happens to Microsoft’s fair value in the quarters ahead.
Microsoft reported solid results. This time, Surface was one of the many bright spots, in addition to Cloud and Gaming. Overall, revenue rose an impressive 18.6% from last year to $29.1 billion.
The company issued an upbeat forecast. Most notably, Dynamics will deliver $2.5 billion in revenue due mostly to the strength of Dynamics 365. To drive demand in this quarter, Microsoft will introduce Dynamics AI.
Dynamics AI is an entirely new suite of tools for customers. The ‘AI’ takes the system of record and engagement and converts it into intelligence. The Mixed Reality tool digitizes physical space and interactions, which customers use to then digitize the critical business process.
Productivity, Processes and Microsoft Stock
The Productivity and Business Processes unit grew 19% Y/Y to $9.8 billion, exceeding expectations. Both on-premise (which just means on-site) and cloud drove sales in the quarter.
Unsurprisingly, Office 365 commercial subscriptions added to favorably to results. ARPU keeps going up, thanks to customers moving from an “E3” workload on to a more expensive “E5” workload.
LinkedIn also performed well. Revenue grew by 33%. The profitability from the job site offset a slight increase in operating expenses and lower gross margin.
Pick Microsoft Stock over IBM Stock
Revenue from Intelligent Cloud grew a very nice 24% to $8.6 billion. Strong demand for hybrid offerings led the unit’s performance.
With numbers like this, it is little wonder that International Business Machines Corporation (NYSE:IBM) is willing to overpay for Redhat to the tune of $34 billion. This acquisition fills IBM’s gap in hybrid cloud solutions but does not solve underlying weaknesses in its other business units.
Investors should stay away from IBM despite the attractive dividend yield of 5.44% and consider Microsoft stock instead. IBM may trade at a P/E of nine times, almost three-fold less than Microsoft’s 25 times P/E, but the latter will keep growing at a solid pace.
Granted, Microsoft’s on-premise and enterprise services units grew at “only” 10% and 6%, the overall revenue growth is sustainable. IBM still needs to figure out how to get rid of or reboot its legacy businesses. And those segments make up a big portion of total revenue for IBM.
Other Businesses
Bing, a search engine that is both inferior and unknown to users, still grew in revenue by 17%. Surface, which started out as a money-losing business, grew in revenue by 14%, thanks to Surface Book 2 and Surface Go.
Apple (NASDAQ:AAPL) announced an incremental upgrade to its MacBook Air and iPad Pro but fell short in a big way. The iPhone giant still started the base MacBook Air with a measly 120GB of SSD storage.
Plus, the Apple computers include last-generation Core Processors from Intel (NASDAQ:INTC). The iPad Pro lacks an earphone jack, forcing users to pay an extra $9 for it. Such annoyances will only benefit Microsoft’s hardware business. Consumers will choose a fully functional Surface device over Apple hardware.
Takeaway
MSFT stock bottomed at around $105 during October’s rout and the downtrend appears over. When considering valuations and profit growth potential, Microsoft shareholders, not Amazon.com, will enjoy another ride up.
Disclosure: The author does not own shares in any of the companies mentioned.
