By Daniel Newman
Tuesday’s wave of Big Tech earnings made it clear that momentum remains on the side of Alphabet /zigman2/quotes/205453964/composite GOOG +0.45% , Apple /zigman2/quotes/202934861/composite AAPL +0.34% and Microsoft /zigman2/quotes/207732364/composite MSFT +0.17% .
All three are big winners. Alphabet weathered Apple’s advertiser-identifier storm. Apple boasted of iPhone and service growth. And Microsoft had the best year-over-year sales growth in three years — 21%.
After first-quarter results were released three months ago, I looked for catalysts that could fuel continued growth for Amazon /zigman2/quotes/210331248/composite AMZN -0.36% .
In this latest quarter, I’m looking at Microsoft’s prospects, and why, despite quarter after quarter of solid results, there is little reason to believe this string of outperformance should end any time soon.
Also by Daniel Newman: Who’s more anti-competitive — Alphabet or Apple?
Cloud expansion is massive
For several quarters, critics have questioned whether Microsoft could maintain its growth in cloud with the Azure number in focus. Amazon’s competing unit, Amazon Web Services (AWS), has reported steady growth of around 30% a quarter, with the most recent total at just over $13.5 billion.
Microsoft, however, delivered about 50% growth at Azure last quarter. And while the company doesn’t disclose the actual revenue number, it does provide a total for its Intelligent Cloud segment, which encompasses more than just the infrastructure (Azure) number. That business had 30% growth, surpassing $17 billion.
It is also paramount to understand that hybrid cloud, which blends on-premise and cloud computing, has largely been declared the preferred compute architecture for enterprises. Microsoft is well-positioned to compete and win significant market share in this area.
Azure Arc, the company’s hybrid and multi-cloud management, is robust. CEO Satya Nadella has been outspoken about Microsoft being an enabler of multi-cloud adoption, including the potential use of competitive cloud offerings. Still, Nadella has shown a strong understanding of the market’s direction and the value of taking an open approach. I expect enterprise users to react positively to this sentiment.
Business applications and Teams
Microsoft’s productivity business jumped 25%, led by strong growth of its Dynamics ERP/CRM and its Dynamics 365 cloud offerings, at 33% and 49%, respectively. Those are solid numbers for this subset and a catalyst for growth despite often flying under the radar.
I’ve had a bullish outlook on Microsoft Dynamics and its cloud offering, Dynamics 365, for some time. This bullish sentiment has been driven by Microsoft’s overall momentum and its vertical integration, bringing infrastructure, data and platform closer together to build a more ubiquitous experience for users that leverage its full stack of solutions.
Over the past several quarters, Microsoft has been actively deepening the integration of its business applications with Microsoft Teams. Those integrations are designed to make Teams the core work hub for enterprise removing friction and enabling more accessibility to systems of records and data for employees.
It may seem nascent, but it is far from that as companies are looking for ways to streamline productivity and move employees out of their inbox. In Tuesday’s earnings announcement, Microsoft updated that Teams has now reached 250 million monthly users. This ecosystem provides a massive opportunity for growth and expansion, and the company’s integration investments should yield meaningful results.
With the Salesforce deal to buy Slack now closed, I see the two companies competing to accelerate innovation even faster as enterprises look to connect collaboration and business applications to adapt to new post-pandemic working styles. However, I see the competition as something that both companies will feed off. This is an instance where I believe competition will be good for both companies.
A question mark
The only genuine concern for the quarter was the 20% decline in Surface, while seemingly all other PC makers are selling devices as fast as they can get chips to manufacture them. With Intel /zigman2/quotes/203649727/composite INTC -0.21% and AMD /zigman2/quotes/208144392/composite AMD +1.25% delivering record-breaking PC results, it feels like the Surface business should be doing better.
Microsoft pointed to the shortage as the impetus of the weaker performance. If that is the case, this short-term lag from devices could turn over the next several quarters as semiconductor manufacturing catches up to the outsized market demand. The quarter’s poor results for Surface is undoubtedly a hiccup for Microsoft but shouldn’t be seen as a long-term issue unless a pattern of declines emerges within the segment.
Avoiding regulatory scrutiny
The past several months have seen a barrage of policymaker activity focusing on rewriting antitrust legislation and further empowering agencies like the FTC to scrutinize and regulate Big Tech. While surely having had its day under the microscope, Microsoft finds itself largely on the outskirts of the current litany of antitrust activity.
While the names more closely attached to the current regulatory efforts like Apple, Alphabet, Facebook /zigman2/quotes/205064656/composite FB +0.50% and Amazon are giving little indication that the regulatory activity will impact near-term results, the continued risk of antitrust reform and its potential to materially change revenue streams or even lead to an unlikely attempt to split any or all of these companies has to remain at least in a small corner of the minds of investors.
Microsoft’s growth has been steady across segments, and the last two quarters have delivered revenue growth at and beyond the company’s best in more than three years. Its products and solutions are delivering outsized growth in the majority of its categories, and its ability to avoid the cost and chaos of regulators at this juncture give it the potential to accelerate while others will be busy defending their business models — something that should help Microsoft’s long-term prospects if even just a bit.
<EMPHASIS>Daniel Newman is the principal analyst at </EMPHASIS>Futurum Research<EMPHASIS>, which provides or has provided research, analysis, advising, and/or consulting to Nvidia, Qualcomm, Microsoft, Amazon and dozens of other companies in the tech and digital industries. Neither he nor his firm holds any equity positions with any companies cited. Follow him on Twitter <INTERNET LOCATION="EXTERNAL" URL="https://twitter.com/danielnewmanuv">@danielnewmanUV</INTERNET></EMPHASIS> .