Last week Microsoft delivered top-and bottom-line results and guidance above estimates resulting from both strong execution across its business and a strong IT spending environment. Although Azure, the company’s cloud business grabbed much of the attention with its 85% revenue growth y-o-y, the bulk of the revenue outperformance was driven by strong performance from its Server and Windows products. This combination provides an encouraging counter to the bear concern around the extent to which the cloud will cannibalize its legacy business. In addition, the company saw an acceleration of its LinkedIn (34% revenue growth y-o-y) and Gaming (38% revenue growth y-o-y) segments showing the breadth of its revenue sources.

The cloud is big business in today’s tech world and Azure has emerged as a duopoly with Amazon’s AWS, differentiated from the latter by Microsoft’s ability to facilitate hybrid configurations, as evidenced by the strong performance of Office 365 and Dynamics 365.

The company’s recently announced acquisition of GitHub, the largest global repository for open source code, suggests that Microsoft is interested in gaining mindshare with software developers, who are gaining increasing influence across industries.

The company provided an upbeat outlook for FY19, projecting optimism on corporate IT spending and a continued increase in demand for cloud services as drivers of ongoing robust growth for Azure, Office, and Windows and further improvements in cloud gross margin. The Technology sector and the US market more generally are not natural hunting grounds for income investors: Tech companies tend to pay no dividends (most notable examples being Amazon or Netflix for instance) and the US market is on average a lower yielding market compared to the rest of the world. At an indicated dividend yield of 1.53% (as at 27 July 2018), Microsoft represents one of the few opportunities for income investors to gain exposure to the potentially attractive structural growth levered to the adoption of cloud computing and digital transformation.


Opinions and views from the Equities team at Kames Capital are not an investment recommendation, research or advice and should not be considered as such. Content discussing investment strategies and stocks is derived from and solely relates to the investment management activities of Kames Capital.

About the author

Alex Kubicka is an investment analyst in the Equities team, responsible for generating investment ideas for our North American and global equities portfolios. He joined us in 2017 from Oddo Asset Management, where he was a global convertible bond investment analyst. Prior to that, Alex worked in analyst roles for Deutsche Bank and Wachovia. He has a BSc in Chemical Engineering from the UC Berkeley and an MBA from the Kellogg School of Management, Northwestern University. Alex has 10 years’ industry experience.*

*As at 30 June 2018.

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