Please ensure Javascript is enabled for purposes of website accessibility

Microsoft Management Talks Commercial Cloud and LinkedIn

By Daniel Sparks – Aug 23, 2019 at 8:31AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

CFO Amy Hood helps investors better understand these two growth drivers.

For most of the year, it's been a close race for the title of the world's most valuable publicly traded company. Indeed, the leader has changed places numerous times. But in recent months, Microsoft (MSFT -1.94%) jumped well ahead of runner-ups Apple and Amazon. Today, the software giant boasts a market capitalization of $1.05 trillion. This means it's worth about $90 billion more than Apple and $154 billion more than Amazon.

The company's trillion-dollar-plus valuation, no matter how gargantuan it might seem, is well merited. Microsoft achieved stellar results in fiscal 2019 as revenue increased 14% year over year to $125.8 billion and operating income jumped 23% to $43 billion. In addition, the company's fast-growing commercial cloud business achieved an annualized revenue run rate of $44 billion by the end of the year.

To better understand the strong drivers for this tech stock, consider some of these key quotes from the company's fiscal fourth-quarter earnings call.

A Microsoft executive discusses the power of Microsoft Azure.

Image source: Microsoft.

Impressive growth in commercial cloud

Microsoft's commercial cloud revenue, or revenue from Office 365, Azure, and Dynamics 365, jumped in fiscal 2019, rising from $23 billion in fiscal 2018 to more than $38 billion. This means commercial cloud revenue now accounts for nearly a third of Microsoft's total revenue.

Growth in multimillion-dollar agreements, particularly for its cloud-computing business Azure, played a key role in Microsoft's commercial cloud revenue growth.

"In FY19, we closed a record number of multimillion dollar commercial cloud agreements, with material growth in the number of $10 million-plus Azure agreements," explained Microsoft CFO Amy Hood during the company's fiscal fourth-quarter earnings call.

An expanding commercial cloud gross margin

It's worth pointing out how Azure's strong growth and improving economics is positively impacting Microsoft's commercial cloud gross profit margin. This metric was 63% in fiscal 2019, up from 57% in fiscal 2018. For the fourth quarter of fiscal 2019, the metric was 65%, up from 59% in the year-ago quarter.

Commenting on commercial cloud's 6 percentage point year-over-year increase in its commercial cloud gross profit margin in its fiscal fourth quarter, Hood noted this was driven "again by significant improvement in Azure gross margin."

Microsoft's LinkedIn acquisition continues to pay off

While the $26.2 billion price tag that Microsoft paid in 2016 to acquire LinkedIn may have seemed steep at the time, it looks like a smart move in retrospect. The social network for professionals has seen consistent growth since it was acquired -- and this momentum continued in Microsoft's most recent quarter. 

"LinkedIn revenue increased 25% -- and 28% in constant currency -- with continued strength across all businesses, highlighted by marketing solutions growth of 42%," explained Hood. "LinkedIn sessions grew 22%, with record levels of engagement and job postings again this quarter."

While Microsoft's commercial cloud and LinkedIn businesses are growing fast, the company is notably benefiting from robust momentum across every segment. In fiscal 2020, investors should look for the software giant's strong growth to continue, thanks to the formidable size of its rapidly growing commercial cloud business and meaningful strength across the rest of its business.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Microsoft. The Motley Fool has the following options: long January 2021 $85 calls on Microsoft. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$232.90 (-1.94%) $-4.60

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
326%
 
S&P 500 Returns
102%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.