All Posts

Microsoft’s Call of Duty

Microsoft’s Call of Duty

At a time when the US market has been plunging into the abyss as the Fed tightens monetary policy and the yield curve steepens, bruised growth investors were looking to the likes of Microsoft to shine a light on the industry and demonstrate its potential.

Microsoft has responded to that Call of Duty, releasing a powerful earnings update hot on the heels of the announcement of the blockbuster acquisition of Activision Blizzard. More on that later.

Microsoft has just delivered a record quarter and the allure of Azure cannot be ignored. Microsoft Cloud banked $22 billion in revenue, up a spectacular 32% year-on-year.

Various reports estimate that the cloud computing will grow at between 20% and 25% over the next few years. The leading players will be slugging it out for market share, and it would be brave (i.e. foolish) to bet against Microsoft competing successfully.

5a847cbfd0307219008b47d3In his usual style, Satya Nadella succinctly describes the opportunity for Microsoft in the opening paragraphs of the Q2’22 earnings call:

“As every company becomes a digital company, they will need a distributed computing fabric to build, manage, secure, and deploy applications anywhere. We have more data centre regions than any other provider, delivering fast access to cloud services while meeting data residency requirements.”

He also managed to use the word “metaverse” in the opening statements; Mark Zuckerberg will be proud.

Another new buzzword (or buzzterm?) that seems to have popped up is “logistics as a service” in collaboration with FedEx. This is a push by Microsoft into the world of supply chain, an industry that was almost invisible until suddenly it wasn’t. With explosive growth in eCommerce and capacity constraints that have brought some industries to their knees, any data advantages in supply chain could be the difference between success and failure for many companies.

Email Banner

You can tell a lot about a company based on what the executives are trying to convince the market to focus on. It took many paragraphs before Nadella discussed something other than cloud computing.

Astonishingly, his next topic for discussion was LinkedIn, giving a further indication of how Microsoft has evolved as a group. The social media platform has surpassed $1 billion in revenue over the past 12 months for the first time.

Across the group, Microsoft generated more than $10 billion in advertising revenue in the past 12 months. There are elements to Microsoft’s business that are hidden in plain sight, helping to generate powerful returns.

Teams is next on his list, boasting 270 million monthly active users. Zoom’s share price has lost around 75% of its value since October 2020, as people have come to realise that video calling is simply a feature in a broader productivity suite rather than a standalone product. There are specialist uses for Zoom in fields like education, but the people have spoken when it comes to the ease of having video calls directly in Teams.

Over 90% of Fortune 500 companies used Teams Phone this quarter, so Microsoft is also winning market share in an industry as old fashioned as simply calling one another.

Nadella talks about a “PC renaissance” with more PCs per household and increased time spent on these devices. Remote working is clearly driving demand for cloud solutions at enterprise and SME level and demand for PCs among individuals. This is the power of the ecosystem that Microsoft has developed.

On the security side, there are more than 1 billion monthly active users who rely on a single login Microsoft account to secure their products and services. There are around 715,000 customers using advanced security solutions. The security business generated more than $15 billion in revenue in the past 12 months, up 45% year-on-year.

Nadella waited until the end of his prepared remarks to comment on gaming. He obviously wanted to finish off with the Activision Blizzard deal that set tongues wagging with a deal value of $68.7 billion!

The official Microsoft press release for the deal highlights that three billion people are actively playing games today (across all platforms) and that gaming is the largest and fastest-growing form of entertainment. With this transaction, Microsoft will become the world’s third-largest gaming company by revenue, trailing only Tencent and Sony.

Microsoft is more than just a cloud business. It’s more than just a social media company. It’s more than just a gaming group. Microsoft is the world’s computer and remains my favourite stock if I was forced to buy and hold one company for the rest of my life.