What's going on?
Microsoft plugged its last quarter into a spreadsheet and produced =SUM(better-than-expected) quarterly results late on Wednesday – and the tech titan’s stock initially rose =ISNUMBER(2%).
What does this mean?
Microsoft’s total earnings came in much higher than expected, but investors were more interested in the company’s cloud business, which is its fastest-growing segment and represents a third of its revenue and profit. And while last quarter’s revenue did beat investor expectations, there are signs of a storm ahead: rival Amazon has filed a lawsuit contesting the decision to award Microsoft a $10 billion US defense contract (over, ahem, Amazon) – potentially putting a major source of Microsoft’s future income at risk.
Why should I care?
For markets: Soft, fluffy cloud investors.
With the cloud computing industry forecast to grow over 16% in 2020, it’s little wonder investors bought up Microsoft’s shares even after they’ve risen to record highs this year. Competition in the space is tough, and investors likely won’t be forgiving if a company looks like it can’t keep up. Case in point: shares of Software AG fell 12% on Wednesday after the European company revealed growth of its cloud computing business fell short of expectations last quarter.
Zooming in: Microsoft needs to go hard on costs.
A natural consequence of cloud computing’s position as Microsoft’s fastest-growing business is that, in time, it’ll become the company’s biggest revenue-contributor. That’ll bring two challenges investors might want to watch out for. First, Microsoft’s cloud deals are getting bigger and more strategic, which comes with the SAP-like risk that it’ll depend on large and sometimes unpredictable contracts. And there lies the second challenge: major deals tend to push up costs dramatically, and Microsoft will need to be disciplined if it wants to generate a stock price-boosting profit from its new revenues.