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Business is Booming at Microsoft

02/05/2020 5:00 am EST

Focus: TECHNOLOGY

Jon Markman

Editor, Tech Trend Trader, The Power Elite, and Strategic Advantage

Stop me if you have read this before: Microsoft (MSFT) reported another blowout quarter on the back of stronger than expected sales from its cloud computing businesses, quips Jon Markman, growth stock expert and editor of Strategic Investing.

The Redmond software giant recently posted $36.9 billion in second quarter revenue, up 14% year over year. Profits surged 38% to $11.6 billion, according to a corporate statement. Business is booming, and the best is yet to come.

This idea may seem implausible. Microsoft is a huge company with annual sales of $125 billion. Getting the needle to move on a number that large is nearly impossible, say the skeptics. However, this line of thinking ignores the dynamism of public cloud computing. It also downplays the importance of scale.

Microsoft is growing quickly because it’s big. The company has the largest network of state-of-the-art data centers. These data farms are strategically located all over the world, to reduce latency.

Moreover, Microsoft has legions of engineers well-equipped to ferret out malicious software, while helping enterprises make the jump to public cloud, hybrid cloud and edge computing. The good news is the corporate world is still in the early stages of the move to cloud-based systems. Microsoft is winning that transition.

A big part of Microsoft’s success is staking out leadership positions in the platforms of the future. I have written at length about its efforts in blockchain, internet of things, and connected cars.

Under Satya Nadella, chief executive officer, Microsoft is succeeding by being the vendor of choice in the corporate world because its business is large, and likely to get much larger.

Scale provides a level of comfort that should not be underestimated. It’s why the firm's financial results, impressive as they may be, are likely only the beginning of what is possible at Microsoft.

Shares trade at 33.6x forward earnings. The market capitalization is $1.28 trillion. While this may not seem cheap, it is given the outlook. Investors are underestimating both the size of the addressable market and what part Microsoft will ultimately claim. Keep buying the shares into any significant weakness.

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