What happened

Shares of Microsoft (NASDAQ:MSFT) popped by 11.7% in October, according to data provided by S&P Global Market Intelligence, a majority of which came after the company reported strong fiscal first-quarter 2018 results near the end of the month.

So what

Investors were pleased to see the company's total revenue increase by 12% year over year to $24.5 billion, and to see Microsoft's net income jump by 16%. Shareholderswere also happy with the sales results from the productivity and business processes segment -- comprised mainly of its Office products -- which grew by 28%. But the big news from the quarterly report came from the cloud computing services unit.

Picture of the outside of a Microsoft building with its logo in front.

Image source: Microsoft.

Microsoft's commercial cloud annualized revenue run rate hit $20.4 billion in the quarter, reaching a goal that CEO Satya Nadella, set back in 2015. At the time, it's commercial cloud business was just $6.3 billion, but the company's efforts over the past two years has made Microsoft a dominant player in the space against rivals Amazon and Google. That has also helped the company grow its bottom line, as the commercial cloud business brings in gross margins of 57%.

Investors took notice of those strong margins, and have been told to expect more of the same. On the quarterly call, Microsoft CFO Amy Hood said :

"We remain committed to material improvement in our commercial cloud gross margin percentage. Margin performance is variable quarter-to-quarter, driven by revenue mix and seasonality as well as the timing of infrastructure spend. We expect continued year-over-year margin improvement and sequential trends consistent with prior years." 

Now what

The company has proven that it can successfully run a cloud computing business even as it grows its traditional software sales and expands further into hardware. This has helped drive investor optimism about Microsoft's stock, pushing the share price up 39% over the past year. And based on its current cloud trajectory, there's no reason why this positive sentiment shouldn't continue. 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Chris Neiger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.