This week Microsoft Corp (NASDAQ: MSFT) released its first quarterly earnings report for this year. The company beat revenue and EPS forecasts in the earnings call. Going through the report, it is evident that Azure, the Microsoft Cloud offering, is pivotal to its success for the quarter.
In its Q1 2022 report, Microsoft had revenues of $45.3 billion, representing a 22% increase over last year. Basic earnings per share were $2.73, which also beat expectations. Net income stood at$3.3 billion, and in this case, the company still exceeded expectations. Some notable figure from the report was that the membership base of LinkedIn is increasing at a fast rate. There are now 800 members on the social network, and Azure had a 46% revenue growth rate.
Despite the powerful earnings call, the stock fell 3.3% at the trading day's close. We were expecting the stock to jump after the positive earnings report. So, we had to re-examine the report and investigate the likely cause of that event.
1 - The Cloud Is The Next Battlefield
Satya Nadella, Chairman and CEO of Microsoft, noted that digital technology has proved to be a deflationary force for small businesses in this period of inflation. That is why many small businesses are thronging to the cloud, where the deployment of business solutions is cheaper than the traditional hardware-based infrastructure. Azure, Microsoft's cloud offering, has proved to be one of the solutions. As a result, many businesses are adopting Azure at a fast rate. Soon, Azure would wrestle for market share dominance with AWS, Amazon's cloud offering.
Cloud computing enhances innovation, and innovation sets many companies apart in a harsh operating environment such as we have now. Automation and improved digital services are also part of the benefits of migrating to the cloud for many small businesses. As a result, it is more effortless and cheap for small businesses to provide their services from the cloud than ever before. That is why Azure and AWS are in a hot battle for the cloud computing market share.
Microsoft (NASDAQ: MSFT) could achieve its revenue growth of 19% thanks to the cloud through its Azure service. This is the best revenue growth for the company in a decade.
2 - Investor Expectations Is A Powerful Effect On Any Stock
There is a worn stock market adage about "buying the rumor and selling the news." This refers to investors' tendency to even sell when there is good news but push up the stock price when there are rumors or expectations. This time around, Microsoft's revenues and earnings per share rose significantly, but investors said it did not convince them at the close of the trading day.
Most investors weighed in that Microsoft's performance will be adversely affected if the lockdown continues in China. That was a highlight of the report. But they fail to realize that the present supply constraints due to the lockdown in China and the war in Ukraine are affecting all tech stocks, not just Microsoft. Among all the tech stocks, Microsoft and Apple ($165.33|-1.02%) have proved more resilient than the rest.
3 - Success Favors Innovative Companies
Despite the selloffs that occurred during the pandemic, Microsoft was one of the stocks that posted impressive revenues in 2020. Now, post-pandemic and amidst a surging inflation and supply chain constraints, especially in the supply of chips used in technological devices, Microsoft has proved resilient and continues to beat investor expectations. This resilient quality is attributed to Microsoft's culture of innovation.
Microsoft has been helping small businesses to innovate all over the world. Their cloud service is a testimony to this fact. Through Azure, small businesses support Microsoft's innovative strategy and enable their survival. It's as if Microsoft is saying to these small businesses: "Come on board, and we'll help you survive." In an innovative collaboration, Microsoft is also aiding its business objectives. No wonder Azure continues to deliver outstanding revenue for the company.
Microsoft remains a great company despite the volatility of the current market. Sitting at $289, it's a good stock to keep on your watchlist.
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