Microsoft: "Taking Share"

Amidst a period of heightened angst among market participants, Microsoft reported strong Q3 FY22 financial results that reminded Mr. Market why the tech giant has been one of the best performing mega cap stocks over the past decade. The highlight for the quarter, as has been the case for much of the past five-plus years, was astounding results in the company’s cloud businesses: In Q3, Microsoft Cloud run rate revenues reached ~$94 billion (+35% YoY in constant currencies) – up >5x from the year-end FY17 run rate, and higher than Microsoft’s total revenues in FY16 (~$92 billion).

In addition, Cloud gross margins in the third quarter reached 70% - a cumulative increase of ~1,200 basis points over the past four years.

As CEO Satya Nadella noted on the Q3 conference call, these stellar results - another quarter of 30%+ top-line growth on a nearly $100 billion Cloud revenue base – are reflective of Microsoft’s massive long-term opportunity (TAM): “Going forward, digital technology will be the key input that powers the world’s economic output. Across the tech stack, we’re expanding our opportunity and taking share… Leading organizations of every size and in every industry trust the Microsoft cloud.”

Today, the Cloud businesses account for just under 50% of Microsoft’s total revenues. Said differently, even if the remaining businesses at the company are unable to grow (they can and they will), the contribution from the 30%+ revenue growth in the Cloud businesses alone is enough to drive double digit topline growth. This has quickly become the driving force of Microsoft’s business – and it has led to revenue growth rates for the company that seemed unimaginable five years ago. (In addition, as the cloud businesses have scaled, corporate EBIT margins expanded by >1,000 basis points.)