Microsoft: Enabling Digital Transformation

“When I look at the next 10 years of what compute and digital technology will do across industries, that's the opportunity that we are obviously staying very, very focused on and investing in”

— Satya Nadella, Microsoft CEO.

Microsoft reported strong fiscal second-quarter (F2Q) revenue and net profit growth of 17% and 33%, respectively, and beat consensus estimates. All three of Microsoft’s business segments reported double-digit revenue growth. Satya Nadella, Microsoft’s chief executive officer, put it best: “We are witnessing the dawn of a second wave of digital transformation sweeping every company and every industry.” Digital technology is becoming critical for business resiliency and continuity. All companies are little-by-little becoming technology companies as they adopt more technology, like the digital cloud, into their business structure and workflow.

We believe Microsoft is well positioned to support organizations’ growing cloud needs as one of the leading and dominant hyper-scale cloud vendors, given its massive customer base, underlying Azure cloud platform, and Microsoft 365 productivity, collaboration, and security solutions. Microsoft’s strong earnings results showcase strong momentum and usage of the company’s products and services. We believe the momentum will continue to compound over the next decade as we’re still in the early innings of modernizing workflow applications and building cloud infrastructure across communities and businesses.

Microsoft is now guiding for fiscal third-quarter (F3Q) revenue growth of $40.35 billion to $41.25 billion, implying 15.3% to 17.9% growth, which is materially ahead of historical average growth rates. Moreover, Microsoft surprised again, as F3Q revenue guidance came in 5% above consensus estimates. This growth is expected to be driven by 46-47% growth in Azure (now a $30 billion run-rate business) and over 40% growth in video gaming (i.e. Xbox). We expect to see growth in Microsoft’s security business, which has posted $10 billion in revenue over the past 12 months, up more than 40% y/y. This makes it one of the largest cybersecurity businesses in the world.

We continue to view Microsoft as a core holding in client portfolios.

Risks include macro volatility and competition from other cloud providers.

Sources
Microsoft Earnings Release FY21 Q2 [LINK]

Information in this article is from sources believed to be reliable; however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. The views are those of the author, Christopher De Sousa, and not necessarily those of Raymond James Ltd. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision. Raymond James Ltd. is a Member Canadian Investor Protection Fund.