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How Microsoft Hit $1 Trillion: Cloud Computing, Steady Growth

By Danny Vena – Apr 25, 2019 at 5:15PM

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The software giant was the third U.S. company to reach the threshold.

Microsoft (MSFT 6.16%) on Thursday became just the third publicly traded U.S. company to reach the $1 trillion market cap benchmark, after it reported a strong quarter earlier in the week. In August 2018, Apple (AAPL 4.86%) first took the spotlight for achieving this feat, followed by Amazon (AMZN 4.46%) in September

Neither Apple nor Amazon were able to stay above the $1 trillion benchmark for long, and Microsoft ultimately dipped below the threshold as the day went on. But it's worth examining what helped Microsoft ascend to these dizzying heights.

Closeup of sheet of 100 Dollar Bills being printed

Image source: Getty Images.

Head in the clouds

Over the past three years, Microsoft stock has soared more than 150% compared with a 40% gain by the S&P 500. A number of factors have contributed to the company's historic rise.

Leading the way is the staying power of the company's Windows operating system, its Office suite of productivity software, and its growing success in cloud computing. And it's the relatively new push into cloud computing that has investors most excited.

While Amazon is still the industry leader in cloud computing with Amazon Web Services (AWS), Microsoft's Azure has been steadily gaining market share. In 2018, AWS generated $25.6 billion in revenue, climbing 47% from 2017. Microsoft doesn't break out revenue from its cloud computing unit, but reported this week that revenue from Azure grew 73% year over year in its fiscal third quarter. The previous three quarters saw year-over-year gains of 89%, 76%, and 76%, respectively. Microsoft's "commercial cloud," which aggregates revenue from Azure, Office 365, Dynamics 365, and LinkedIn commercial, grew to $9.6 billion for the third quarter, up 41% year over year.

That isn't all that has investors upbeat. The company's generous capital return policy has been a boon to shareholders. Late last year, Microsoft raised its dividend 9.5% to $0.46, marking the ninth increase in as many years; the company expanded its payout by 254% over that time. It has also been buying back shares, and over the past decade has reduced its share count by more than 13%. 

A push toward the top

It isn't just cloud computing that has propelled Microsoft higher. The company has been experiencing a renaissance of sorts, and its recent earnings results tell the tale. For its fiscal third quarter, it reported revenue of $30.6 billion, up 14% year over year, with solid gains across each of its major operating segments. Operating income increased an even more impressive 25%, resulting in EPS of $1.14.

Meanwhile, revenue from LinkedIn grew by 27%, while Surface computer products saw a 21% increase, both year over year. Even the company's legacy software segments produced solid growth, with both the commercial and consumer versions of Office up 12% and 8%, respectively.

What this means for Microsoft's future

It turns out that the things that drove Microsoft shares skyward -- consistent growth in revenue and profitability, its gains in cloud computing, and its generous capital returns -- are the same things that make it a compelling investment.

It's important to note that the $1 trillion market cap benchmark is completely arbitrary; companies don't gain anything other than bragging rights and potentially a footnote. But the strength of Microsoft's underlying business will likely reward shareholders for years to come.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Danny Vena owns shares of Amazon and Apple. The Motley Fool owns shares of and recommends Amazon, Apple, and Microsoft. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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