Why is Microsoft Still Growing?

By Sanjay Achar '17

According to average analyst estimates, Microsoft was expected to post earnings of 50 cents per share last Thursday, compared to earnings of 62 cents per share one year earlier. Microsoft’s widespread job cuts and the costs to integrate Nokia’s mobile phone business (which Microsoft purchased last Spring) were expected to create a drag of 6 cents per share. However, Microsoft continued to defy estimates, with earnings at $0.54 per share, and revenues rising 11% from the previous year, in the three months ending on September 30^th (not including Nokia’s mobile-phone business). Most competitors to Microsoft including IBM, HP and Oracle have posted sinking or slow sales growth. Therefore, it appears that Microsoft is “bucking the trend,” as said by analyst Daniel Ives of FBR Capital Markets. Following the release of the financial report, Microsoft’s stock rose 3.1% in after-hours trading on Thursday, reflecting the strong revenue and profit growth of the past year and continuing the stock’s 33% climb since this past year. Overall in the quarter, revenue was $23.2 billion, including the $2 billion Nokia business, compared to $18.5 billion one year ago, and net income was 54 cents per share, down from 62 cents per share.In order to analyze what is driving up Microsoft’s stock price, it is important to break down the growth of Microsoft and determine whether this is sustainable. Over the last quarter, Microsoft’s revenue from software for business customers rose more than 9.5% from a year earlier. Microsoft had robust growth in new offerings, such as the version of Windows for computer servers and Microsoft 365, revenue more than doubled for the Surface tablet computer, and cloud software sold to businesses more than doubled. A large reason for the cloud revenue doubling is due to the success of Microsoft’s hybrid approach to the cloud, which allows customers to intermingle data from their internal servers with those of multiple clouds. This success suggests that the corporate world is moving more to the cloud, making this an industry with high growth potential. Early last week, CEO Satya Nadella pitched Microsoft’s strength in cloud-based business services, saying that Microsoft is uniquely positioned to help companies modernize their technology. In order to justify their rising stock price, investors would need to see this kind of growth continue. Though it Microsoft appears to have a competitive advantage in this area, there are competitors who are growing stronger, and the changing needs of corporations could impact demand.Even though sales of Windows-powered Nokia smartphones rose, the company continues to lose market share to Apple and manufacturers of phones that run Google’s Android operating software, as shown by its decrease in net income from its mobile-phone operating software business. Microsoft said it would cut roughly $1 billion from Nokia’s annual operating costs by June, as it tries to stop Nokia from losing more money. Additionally, it needs to sell more smartphones, as their market share in smartphones has dropped even more to 2.5%. Consumer products are also needed to fuel consumer demand for other business offerings, though this will likely lower Microsoft’s generally high operating margins. Therefore, there are many factors which need to be considered before taking the growth of Microsoft for granted.Sources:http://blogs.wsj.com/digits/2014/10/23/microsoft-earnings-what-to-watch-5/?mod=ST1http://blogs.wsj.com/cio/2014/10/24/the-morning-download-microsofts-hybrid-vision-of-the-cloud-strikes-a-chord/?mod=ST1http://blogs.wsj.com/cfo/2014/10/24/the-morning-ledger-compliance-as-a-competitive-advantage/?mod=ST1http://online.wsj.com/articles/microsofts-cloud-growth-continues-1414095291?mod=ST1