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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 titans stock initially rose =ISNUMBER(2%).
What does this mean?
Microsofts total earnings came in much higher than expected, but investors were more interested in the companys cloud business, which is its fastest-growing segment and represents a third of its revenue and profit. And while last quarters 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 Microsofts 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, its little wonder investors bought up Microsofts shares even after theyve risen to record highs this year. Competition in the space is tough, and investors likely wont be forgiving if a company looks like it cant 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 computings position as Microsofts fastest-growing business is that, in time, itll become the companys biggest revenue-contributor. Thatll bring two challenges investors might want to watch out for. First, Microsofts cloud deals are getting bigger and more strategic, which comes with the SAP-like risk that itll 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.
Originally posted as part of the Finimize daily email.
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