Microsoft Shares Hit a New High, Fueled by Cloud

Since the advent of the pandemic, the cloud has been growing like mad -- fueled by accelerated efforts toward the much-vaunted digital transformation. Two of the top three cloud providers, Google and Microsoft, printed quarterly earnings last night, which gave some clues on the direction of the cloud business.

While it's clear from earnings results that Google is still mostly an online advertising company wherein cloud is only starting to move the needle, Microsoft reinforced its position as the cloud and enterprise goliath -- and it's just a hair away from passing Apple in being the most valuable company in the world.

Microsoft Shares Hit ATH

Microsoft reported an astounding $45.32 billion in quarterly revenue, compared with the $43.97 billion as expected by analysts. That represents 22% growth year-over-year, a shocking level of growth considering the size of the company. Earnings came in at $20.51 billion, or $2.27 per share, adjusted, vs. $2.07 in estimates.

Following earnings reports, both companies reported cloud growth of 50% year-over-year (y/y), but Microsoft investors liked the results better, pushing Microsoft stock up 3% while Google shares were up 2% in early trading. Microsoft shares hit a new all-time high, crossing the $320 line for the first time.

Microsoft is also close to becoming the world's most valuable company, as its market cap at $2.41 is just a a few ticks behind Apple's $2.48 valuation, as of early-morning trading.

Google's Bid for Cloud Gains Slow

Google parent company Alphabet on Tuesday reported revenue of $65.12 billion, a 41% year-over-year increase, representing its largest growth in 14 years. Profit was $21.03 billion, or $27.99 per share vs. $23.48 per share expected by analysts. Results were driven by by Search, Maps, and YouTube, with $53.13 billion in sales from advertising, a 43% increase.

On the cloud front, both companies reported strong cloud growth, although Microsoft slightly edged out Google from a higher base. Microsoft's Azure cloud division reported 50% y/y growth, which was consistent with the past four quarters, which have all been at about 50%. Microsoft's "Intelligent Cloud" division reported $18.4 billion in revenue. Google’s cloud division grew 45% y/y to $4.99 billion. It is still showing an operating loss of $644 million. Analysts had expected a slightly higher number.

The results show that Microsoft has been keeping pace in cloud with the number-one player, Amazon Web Services (AWS), possibly even gaining a few points of market share. Google, which had been gaining share, has not made any market-share gains in the last couple of quarters.

In addition, Microsoft remains a better diversified company with its robust enterprise software business. Sales of Office 365 to business customers rose 23%, as demand for cloud software features drove margins and revenue.

Still yet, shares of both companies vaulted as investors snapped up two of the leading technology and cloud companies in the world. Google shares were up 2% in early trading and Microsoft shares were up about 3%. Microsoft shares today hit a new all-time high of $320, while Google shares are slightly off their highs of $2,925, trading around $2,873.

Capex Slight Down

In one sobering aspect of the reports, both companies reported slower capital expense (capex) budget, indicating their investment in infrastructure may slow.

According to Raymond James analyst Simon Leopold, the two cloud giants together reported cash capex spending of $12.6B, 7% below analyst consensus estimates of $13.5B, reported by (FactSet). Still, these numbers were up 23% year over year.

From Leopold's note:

Regarding supply chain constraints in their data centers, Google did not comment, and Microsoft indicated it was managing the challenges. Google attributed the bulk of its quarterly expenditures to investments in technical infrastructure, particularly servers in support of its growing cloud business. Microsoft guided for a sequentially in-line capex on a dollar basis for December 2021 (F2Q22), roughly in-line with consensus of $6.0B.