“What’s most probably important for the company is not the reported segments but their commercial cloud”. Bernstein’s Senior Research Analyst, Mark Moerdler, in a CNBC interview, said that Azure is responsible for the recent growth of Microsoft Corporation.
As we all know, Microsoft Corporation (NASDAQ:MSFT) is a company that develops, manufactures, and sells computer software and related services. It is widely known for its Microsoft Windows which is typically installed on windows based laptops or computers. The company currently has a whopping $1.8 trillion market capitalization. It was able to deliver a 33.30% return in the past 12 months and settled at $239.65 per share at the closing of February 1st.
Microsoft Azure, on the other hand, is a public cloud computing platform that relies on virtualization technology. Its services include Infrastructure as a Service (IaaS), Platform as a Service (PaaS), and Software as a Service (SaaS). These services of Azure can be used for analytics, virtual computing, storage, networking, and a lot more. “Commercial cloud spans Azure Office 365, Dynamics 365, and LinkedIn. It brings together all of the growth parts of the business, and that’s been an engine of the business. The key driver of that is Azure, which re-accelerated quarter over quarter, surprising most including ourselves frankly in terms of the strength, and probably the sustainability of that strength.”, Moerdler marked.
It is apparent that Small and Medium-sized Businesses (SMB) have tended to be a weak spot, while the higher-end consumer companies remained strong. On the other hand, according to Moerdler, SMB turned out to be more improved this quarter. “They’re the first of our companies to call out specifically, that SMB started to come back and increase what they’re doing.”. He also said that there were concerns about possible layoffs and shrinkage in SMB but clearly, that is not what we’re seeing today. “It looks like at least as the case of Microsoft, SMB is starting to come back to technology because they needed to differentiate what’s the read-throughs in here,”.
According to Moerdler, Microsoft saw a couple of key drivers of the strength in its business. One thing is, companies that placed projects on hold during the beginning or middle of the pandemic have started to come back to continue those projects especially their lift and shift to the Cloud, to Azure, and to Office 365 in dynamics. The second was that industries that were negatively impacted by Covid started to show some improved strength from an interest in technology. “SMB seems to be just starting to come back and if it’s not just a Microsoft specific tailwind, the software is going to do quite well and we can see that in other areas in tech.”, he marked.
Microsoft obviously keeps dry powder because they need to invest to drive the cloud growth but they’ve got a huge amount of cash and availability to bring on debt at almost no cost when so they desire. “Acquisitions need to be disruptive to the Microsoft business and we saw that with the interest in TikTok. Microsoft wants to do things that frankly initially I’m going to scratch my head over, and then I’m going to understand as I think about it more.”, said Moerdler while also noting that return of cash has been always part of the plan. He concludes by saying, “The company is throwing off a ton of cash, and as they throw off a ton of cash they’re not going to want to make acquisitions that don’t make perfect sense. There’s only so much you can invest in the business and it wouldn’t surprise me if we see an increase in return of cash going forward.”.
