Microsoft Stock: Azure Growth Proves Resilient (2022)

Most investors agree that cloud is a critical trend to have in a portfolio as the category’s growth has been resilient due to increasing productivity while reducing costs. This is especially true for software-as-a-service whereas cloud infrastructure as-a-service does not always result in lower costs compared to on-premise servers.

The overall cost savings and/or overhead can often rely on the size of company, where it makes sense for startups to rent servers as they don’t have the budget to own servers and manage an IT department. However, despite the many advantages that cloud offers, it requires scaling through outside vendors, which can result in a hit to margins. A report came out that repatriation, or moving some workloads back to on-premise, has resulted in quite a bit of cost savings for companies like Dropbox and Zscaler, who use hybrid approaches. One example in the report is Dropbox, a company that reported savings of $75 million in two years after repatriation, which in turn, helped the company’s gross margins increase from 33% to 67%.

If you add up the cloud infrastructure, platforms and software costs across a company, it can often become costly to manage and deploy a full cloud stack.

To put it simply, Sayta Nadella said in the fiscal Q3 call in April: “More value for less price means you win.”

The company’s recent results prove that the company is able to better withstand the challenges of the macro uncertainty better than other cloud peers.

For example, Azure & other cloud services revenue grew by 40% and 46% in constant currency. As stated, Azure’s growth was a major highlight considering Google Cloud’s revenue in the recent quarter increased 36% YoY to $6.3 billion. Notably, GCP is on a lower revenue base which makes Microsoft’s outsized growth even more impressive. The market leader Amazon Web Services revenue grew by 33% YoY to $19.7 billion in Q2.

Here’s how the major cloud IaaS competitors compare:

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(Video) Microsoft Stock: Azure Growth Proves Resilient (NASDAQ:MSFT)

Furthermore, Microsoft’s Fortune 500 penetration is staggering with 95% using Azure. This was achieved through hybrid computing where Microsoft was first-to-market on serving a mix of on-premise, private and public clouds for their large enterprise customers. We covered Microsoft’s competitive edge on hybrid dating back to 2018 when Azure was frequently doubted by the market as it was overshadowed at the time by AWS.

Today, Microsoft is leveraging its lead in hybrid by undercutting other services on price in order to win the aggregate, long-term contract. By owning the entire cloud stack, Microsoft can offer the ultimate differentiator during macro headwinds, which is “more value for less price” whereas competitors do not own enough of the stack to undercut on price quite like Microsoft.

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We originally covered this for our research customers in both our Q2 webinar and a research note last April.

Microsoft’s Financials:

Microsoft’s revenue grew by 12% YoY to $51.9 billion for the Q4 FY2022 ending in June, and for the FY2022 ending in June, it grew by 18% YoY to $198.3 billion.

The company’s strong guidance for the full year was a testimony to the management's confidence as many of its tech peers failed to give guidance. Amy Hood, CFO of the company said in the earnings call, “We continue to expect double-digit revenue and operating income growth in both constant currency and U.S. dollars. Revenue growth will be driven by continued momentum in our commercial business and a focus on share gains across our portfolio.”

Notably, Microsoft’s stock has outperformed the market with returns of 290% in the last five fiscal years from 08/01/2017 to 07/31/2022. The stock has the second highest returns among the FAAMG stocks, behind Apple which is up 330% during this period.

Microsoft’s Revenue Segments:

The company reports its revenues in three segments.

Productivity and Business Processes Segment:

The Productivity and Business Processes segment revenue grew by 13% YoY to $16.6 billion, which includes Office Commercial, Office Consumer, Dynamics, and LinkedIn. LinkedIN came in at 24% growth yet this was lower than the management’s expectation due to a slowdown in advertising revenue. According to management, Teams continues to “take share across every category” and is “seeing higher usage intensity.”

The operating income of this segment increased by 12% YoY to $7.2 billion. The segment accounts for 32% of the total revenue and 35% of the group’s total operating income. The management expects the Productivity and Business Processes segment revenue to be $16.1 billion at the mid-point of the guidance in the next quarter for a slight decline sequentially.

Intelligent Cloud Segment:

The Intelligent Cloud segment revenue grew by 20% YoY to $20.9 billion. The management’s guidance was $21.05 billion, the negative impact from the strong dollar led to the slight miss in this segment. The server products and cloud services revenue grew by 22%, helped by Azure & other cloud services growth of 40%. On a constant currency basis, Azure grew by 46% and the management is guiding for a growth of 43% (constant currency) in the next quarter.

The company also saw strong commitments from its customers as it witnessed a record number of over $100 million Azure and $1 billion deals this quarter. This has a flywheel effect for Microsoft’s data solutions and platforms, as well. Satya Nadella said in the earnings call, “More than 65% of the Fortune 1000 use 3 or more of our data solutions, and we are growing faster than the market.” Cosmos DB data volumes and transactions grew over 100% YoY for the fourth consecutive quarter.

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This segment’s operating income increased by 11% YoY to $8.7 billion. The segment accounts for 40% of the Microsoft’s total revenue and 42% of the total operating income.

Intelligent Cloud revenue is expected to be $20.45 billion in the next quarter, or essentially flat sequentially.

More Personal Computing Segment:

The More Personal Computing revenue grew by 2% YoY to $14.4 billion. It was below the management’s guidance of $14.69 billion. The slowdown in this segment was expected since there is weakness in the PC business. Tracking the recent IDC preliminary results suggest that global traditional PC shipments fell 15% in Q2 2022, and the company results were good taking into consideration the macro numbers. Amy Hood said in the earnings call, “Despite the deteriorating PC market, we saw share gains again this quarter and volumes remained above pre-pandemic levels.”

The management expects More Personal Computing revenue to be $13.2 billion in the next quarter, which will be lower sequentially.

Microsoft Flexes Its Muscle on Margins

Microsoft flexed its muscle on margins during a time when many companies are stumbling on the bottom line. This was especially evidenced by Microsoft announcing an accounting change to the life of its servers to offset FX headwinds. We detail this in the section below.

The company’s gross profits increased 10% YoY to $35.4 billion. The gross margin was 68.3% compared to 69.7% in the same period last year. Excluding the impact of the change in the accounting estimate, the gross margin was relatively unchanged.

The operating margin was 39.6% compared to 41.4% in the same period last year. Excluding the impact of the change in the accounting estimate and FX, the operating margin would be relatively unchanged.

The net income was $16.7 billion or $2.23 per share compared to $16.5 billion or $2.17 per share. The strong US dollar negatively impacted revenue by $595 million and EPS by $0.04 in the recent quarter.

The company’s cash flows continued to be strong in the recent quarter. Cash from operations grew by 8% YoY to $24.6 billion (47% of revenue) and free cash flow increased by 9% YoY to $17.8 billion (34% of revenue).

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The company has cash and investments of $104.8 billion and a debt of $49.8 billion. The company returned 12.4 billion to the shareholders in the form of share repurchases and dividends in Q4 FY2022, up 19% YoY, and the company spent a similar amount in Q3 FY2022.

FX Headwinds Expected to Ease in 2023

The management expects Q1 FY2023 revenue to grow 10% YoY at the mid-point of the guidance to $49.75 billion. They expect FX headwinds to be higher in the first half of the fiscal year when compared to the second half. For the full year, they expect double-digit revenue and operating income growth. The management expects to complete the acquisition of Activision Blizzard by the end of this fiscal-year and the guidance excludes the impact from the acquisition.

The company also made an accounting change in the useful life for server and network equipment assets from four to six years which will extend the depreciation expenses for the company. This will have an immediate benefit to the company’s bottom line. Amy Hood said in the earnings call, “First, effective at the start of FY '23, we are extending the depreciable useful life for server and network equipment assets in our cloud infrastructure from 4 to 6 years, which will apply to the asset balances on our balance sheet as of June 30, 2022, as well as future asset purchases.

As a result, based on the outstanding balances as of June 30, we expect fiscal year '23 operating income to be favorably impacted by approximately $3.7 billion for the full fiscal year and approximately $1.1 billion in the first quarter.”

On the other hand, Apple did not give the exact revenue guidance for the next quarter. The company’s CFO said in the earnings call, “Given the continued uncertainty around the world in the near term, we are not providing revenue guidance but we are sharing some directional insights based on the assumption that the macroeconomic outlook and COVID-related impacts to our business do not worsen from what we are projecting today for the current quarter.

Overall, we believe our year-over-year revenue growth will accelerate during the September quarter compared to the June quarter despite approximately 600 basis points of negative year-over-year impact from foreign exchange.”

Similarly, Meta Platforms guided revenue of $26 billion to $28.5 billion, or a YoY decline of 6% at the mid-point of the guidance. The guidance considers the weak advertising demand the company experienced in the recent quarter and the foreign exchange headwinds of 6%. Meta’s guidance disappointed investors as they were expecting a return of growth in the next quarter after the revenue declined for the first time in Q2.

Royston Roche, Equity Analyst at the I/O Fund, contributed to this article.

Please note: The I/O Fund conducts research and draws conclusions for the company’s portfolio. We then share that information with our readers and offer real-time trade notifications. This is not a guarantee of a stock’s performance and it is not financial advice. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund own Alphabet and Microsoft at the time of writing.

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FAQs

What is Azure resiliency? ›

Resiliency in Azure supports and advances capabilities that respond to outages in real time to ensure continuous service and data protection assurance for mission-critical applications that require near-zero downtime and high customer confidence.

What feature of Azure helps to provide resiliency and high availability in spite of transient failures? ›

Architecting resiliency into your application framework ensures your workloads are available and can recover from failures at any scale. Building for reliability includes: Ensuring a highly available architecture. Recovering from failures such as data loss, major downtime, or ransomware incidents.

What are Microsoft's Azure competitive advantages? ›

Azure allows you to build, deploy, and manage apps more quickly and easily without having to buy and/or maintain the underlying infrastructure. Azure's integrated cloud resources meet all your security and compliance requirements while being easily customizable for a company's unique needs.

What is the main strength of Microsoft Azure on the cloud? ›

Azure is the only consistent hybrid cloud, delivers unparalleled developer productivity, provides comprehensive, multilayered security, including the largest compliance coverage of any cloud provider, and you'll pay less for Azure as AWS is five times more expensive than Azure for Windows Server and SQL Server.

How reliable is Microsoft Azure? ›

It's critical that organizations using Microsoft Azure get the right tools, information, and training to create and manage Azure with confidence in its reliability. A 2019 report revealed that Microsoft Azure delivered “an average uptime of 99.995% for its core compute services” (Cloud Wars, 2019).

What is application resiliency? ›

Application resilience is the ability of an application to react to problems in one of its components and still provide the best possible service. Resiliency has become more important as organizations continue to rapidly implement software across multi-tier, multiple technology infrastructures.

What configuration should use to increase resiliency of the two VMs in Azure? ›

To improve application resiliency, Azure serializes platform updates (planned maintenance) across each region pair, so only one paired region is updated at a time. When you design a multiregion application, take into account that network latency across regions is higher than within a region.

Which of the following options helps Azure maintain high availability and fault tolerance when deploying and upgrading application? ›

1 Answer. The correct answer is 1 - Availability sets.

What features does Microsoft Azure have to provide high availability? ›

You can achieve high availability with native Azure tools and services such as Azure Backup, Azure Site Recovery, and Azure High Availability zones. Cloud Volumes ONTAP leverages native Azure Storage capabilities like snapshots, disaster recovery, encryption, and low-RPO HA configuration.

Why is Microsoft Azure the best? ›

Azure facilitates easy mobility and a reliable consistent platform between on-premise and public Cloud. Azure provides a broader range of hybrid connections including virtual private networks (VPNs), caches, content delivery networks (CDNs), and ExpressRoute connections to improve usability and performance.

How does Microsoft gain competitive advantage? ›

Key Takeaways. Microsoft has what Warren Buffett calls a strong moat: competitive advantages that protect it from rivals and enable its large profits. Microsoft's intellectual property—specifically, its patents and proprietary software code—contribute to the depth of its moat.

Why is Azure better than other clouds? ›

Azure offers services designed for hybrid cloud which means it's a great choice if your organisation is using a combination of on-premises and cloud services, or a combination of public and private cloud. For security, Azure has a unified identity platform and cohesive approach to cover all types of cloud.

Why is Azure so popular? ›

An Azure environment helps you break away from on-premises servers. Physical servers can be expensive to maintain. They're also vulnerable to data loss from hardware malfunctions. However, the cloud-based system means you can harness the power of Microsoft technology without limitations.

What is Azure cloud and advantages? ›

Azure Bastion. Fully managed service that helps secure remote access to your virtual machines. Web Application Firewall. A cloud-native web application firewall (WAF) service that provides powerful protection for web apps.

What are the pattern comes under resiliency? ›

Resiliency
PatternSummary
BulkheadIsolate elements of an application into pools so that if one fails, the others will continue to function.
Circuit BreakerHandle faults that might take a variable amount of time to fix when connecting to a remote service or resource.
6 more rows
13 Dec 2021

What are the disadvantages of Azure? ›

Cons of Microsoft Azure
  • Complexity. As a SaaS platform, Azure can easily become an extremely complicated environment for larger companies. ...
  • Data Transfer. Azure services are all subject to data transfer fees that are often the cause of stacked hidden fees. ...
  • Support. ...
  • Complicated Pricing.

Is Azure more secure than AWS? ›

AWS and Azure are almost evenly matched. Except AWS offers slightly more secure encryption with the addition of the Galois Counter Mode (GCM). Furthermore, AWS has more encryption services and key management options. Finally, AWS has more in-depth documentation for its services and options than Azure.

What makes a system resilient? ›

What Makes a System Resilient? Basically, a system is resilient if it continues to carry out its mission in the face of adversity (i.e., if it provides required capabilities despite excessive stresses that can cause disruptions).

How can resilience be improved? ›

9 Tips to Improve Your IT Environment Resiliency Now
  1. Focus on likely scenarios first. ...
  2. Have an intentional focus on disaster avoidance. ...
  3. Have a clear scope of DR strategy. ...
  4. Leverage existing information. ...
  5. Correlate SLAs with continuity and recovery data protection tooling capabilities. ...
  6. Know your environment and dependencies.

How do you measure application resiliency? ›

Resilience targets are typically measured by two metrics: Recovery Time Objective (RTO), the time it takes to recover from a failure, and Recovery Point Objective (RPO), the maximum window of time in which data might be lost after an incident.

What is platform resiliency? ›

The Resilience Platform is a collaborative online space to capture, access, co-create and advance the latest resilience knowledge. Have a look at the solutions, stories, people & initiative profiles as well as the latest evidence and tools.

Which three of the following statements is true about Azure backups? ›

Which three of the following statements is true about Azure backups? Azure backup uses cached files. You should allow at least 10% of the production server disk for caching. Azure will encrypt and decrypt your files using a passphrase that you supply.

What are the two types of scaling on Azure? ›

Two main ways an application can scale include vertical scaling and horizontal scaling. Vertical scaling (scaling up) increases the capacity of a resource, for example, by using a larger virtual machine (VM) size. Horizontal scaling (scaling out) adds new instances of a resource, such as VMs or database replicas.

Which of the following statements are correct Windows Azure acts as a cloud operating system? ›

Windows Azure acts as a cloud operating system. Windows Azure Platform permits a developer to change his application so it can function in the cloud on virtual machines hosted in Microsoft data centers. With Azure's architecture, an application can run locally, run in the cloud, or some combination of both.

Which of the following is true for Azure table storage Mcq? ›

It is possible to specify a container and its blob public. D. All of these. Explanation: All the above three statements hold true for Azure Storage.

What is availability zone and availability set in Azure? ›

While availability sets are used to protect applications from hardware failures within an Azure data center, availability zones, protect applications from complete Azure data center failures. An availability zone is a unique physical location that exists within an Azure region.

What is the concept of availability in Azure? ›

An availability set is a logical grouping of VMs that allows Azure to understand how your application is built to provide for redundancy and availability. We recommended that two or more VMs are created within an availability set to provide for a highly available application and to meet the 99.95% Azure SLA.

Which service in Microsoft Azure is responsible for achieving high availability and reliability? ›

Azure Firewall offers fully stateful native firewall capabilities for Virtual Network resources, with built-in high availability and the ability to scale automatically. We guarantee that Azure Firewall will be available at least 99.95% of the time, when deployed within a single Availability Zone.

What is the importance of availability zones in Azure? ›

Azure availability zones are connected by a high-performance network with a round-trip latency of less than 2ms. They help your data stay synchronized and accessible when things go wrong. Each zone is composed of one or more datacenters equipped with independent power, cooling, and networking infrastructure.

Why do customers choose Azure? ›

No Physical Hardware Is Needed

One of the top reasons why people move to Azure is to avoid the cost of building and running an on-site data center. Not only will you need a large investment in the hardware but also need the right talent to maintain it.

What is Azure in simple terms? ›

What is Azure? At its core, Azure is a public cloud computing platform—with solutions including Infrastructure as a Service (IaaS), Platform as a Service (PaaS), and Software as a Service (SaaS) that can be used for services such as analytics, virtual computing, storage, networking, and much more.

What are the features of Azure? ›

Featured
  • Provision Windows and Linux virtual machines in seconds.
  • Enable a secure, remote desktop experience from anywhere.
  • Managed, always up-to-date SQL instance in the cloud.
  • Fast NoSQL database with open APIs for any scale.
  • Build and scale with managed Kubernetes.
  • Deploy high-quality AI models as APIs.

What are the key elements of Microsoft's strategy? ›

Additionally, the company's business strategy is currently focused on three elements – 'cloud-first, mobile-first', growth through mergers and acquisitions and exploring business opportunities related to AR/VR (Augmented Reality and Virtual Reality).

What strategy does Microsoft use? ›

Microsoft's Generic Strategy (Porter's Model)

Microsoft Corporation uses broad differentiation as its generic strategy for competitive advantage. Broad differentiation involves unique products sold to a wide variety of customers.

What is the main strength of Microsoft Azure on the cloud? ›

Azure is the only consistent hybrid cloud, delivers unparalleled developer productivity, provides comprehensive, multilayered security, including the largest compliance coverage of any cloud provider, and you'll pay less for Azure as AWS is five times more expensive than Azure for Windows Server and SQL Server.

Is Microsoft Azure worth? ›

The growing demand for a career in cloud computing is a good enough reason to acquire an Azure certification. It can also help you gain better career opportunities in different sectors and locations. In addition, the certificate offers many professional development options that can help you achieve your goals.

What is Azure platform as a service? ›

Platform as a service (PaaS) is a complete development and deployment environment in the cloud, with resources that enable you to deliver everything from simple cloud-based apps to sophisticated, cloud-enabled enterprise applications.

What is resilient architecture? ›

The AWS Well-Architected Framework defines resilience as “the capability to recover when stressed by load (more requests for service), attacks (either accidental through a bug, or deliberate through intention), and failure of any component in the workload's components.”

Which Azure feature enhances manageability and reliability? ›

Provisioning multiple instances improves both resiliency and scalability. For Azure App Service, select an App Service plan that offers multiple instances.

What are three main aspects of resilience design? ›

The Resilient Design Principles
  • Resilience transcends scales. ...
  • Resilient systems provide for basic human needs. ...
  • Diverse and redundant systems are inherently more resilient. ...
  • Simple, passive, and flexible systems are more resilient. ...
  • Durability strengthens resilience.

Why resilient design is important? ›

Resilient Design is planning and designing our built environment to sustain probable impact from progressive climate change and episodic natural disasters. What are the impacts of progressive climate change and natural disasters? The cost of weather or climate related disasters is very high.

What is resilience pattern? ›

What Are Resilience Patterns? Resiliency patterns are a type of service architecture that help to prevent cascading failures and to preserve functionality in the event of service failure. Common resiliency patterns used in application development include the bulkhead pattern and circuit breaker pattern.

How can I get high availability in Azure? ›

A 5-Step Azure High Availability Checklist
  1. Define Availability Requirements. Identify the cloud workloads that require high availability and their usage patterns. ...
  2. Plan your High Availability Architecture. ...
  3. Perform End-to-End Testing. ...
  4. Deploy Applications Consistently. ...
  5. Monitor Application Health.
20 Jan 2020

What is scalability in Azure? ›

Scalability is the ability of a system to handle increased load. Services covered by Azure Autoscale can scale automatically to match demand to accommodate workload. These services scale out to ensure capacity during workload peaks and return to normal automatically when the peak drops.

What feature does Azure availability sets provide? ›

An availability set is a logical grouping of VMs that allows Azure to understand how your application is built to provide for redundancy and availability. We recommended that two or more VMs are created within an availability set to provide for a highly available application and to meet the 99.95% Azure SLA.

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