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July 19, 5:00 pm EST This week, earnings have been a nice distraction from the market’s Fed watching obsession. Second quarter earnings have gotten off to a good start with very strong earnings from the big banks. And those earnings have been driven by strong consumer business. Today we heard from Microsoft. The company grew earnings by 20% year-over-year, and with 12% revenue growth. We talked about MSFT earnings back in April, when Microsoft became the third trillion-dollar company. The first was Apple. And then Amazon. But despite the market sitting on new record highs, Microsoft now stands alone as the only trillion-dollar company. Let’s revisit the story from my April note, on how Microsoft has transformed itself from a path of obsolescence to quadrupling in value in just six years. The CEO, Satya Nadella, gets the credit, but it has everything to do with a guy named Jeff Ubben. Back in April of 2013, an activist investor named Jeff Ubben took a $2 billion stake in MSFT. That same month Business Insider wrote a story titled: “Microsoft Could Be Obsolete By 2017.” The stock had gone nowhere for more than a decade. Ubben won a board seat and he pushed for stock buybacks and a strategy reset. He pushed out the CEO, Steve Balmer. He replaced him with Satya Nadella, who was running the Miscrosoft cloud business. His job was to turn Miscrosoft into a cloud computing company. He has done it.
Microsoft is now the number two cloud computing platform globally, behind Amazon. For perspective, Bottom line: Amazon and Microsoft have a duopoly in the high growth digital storage business (i.e. cloud Amazon’s retail business gets all of the attention, but it’s cloud business has been subsidizing it’s retail business for a long time. The hyper-growth in cloud and the market dominance held by Amazon and Microsoft are why their market value has gone to a trillion-dollars, and why their charts look so similar …
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