Microsoft (MSFT 0.37%) is no stranger to making waves in the technology world. Earlier this year, it announced plans to acquire video game company Activision Blizzard, and most recently surprised Wall Street and retail investors alike with better-than-expected earnings for its fiscal 2022 third quarter. Although results across its various business segments were impressive, Microsoft's cloud unit, Azure, was the big winner.
Top-notch financial profile
For the period, which ended March 31, Microsoft reported revenues of $49.4 billion, up 18% year over year. While the technology behemoth enjoyed meaningful growth across various business segments -- including its suite of Office products (which includes Microsoft Word and Excel), its Xbox video game unit, and professional social networking property LinkedIn -- the company's cloud unit took the crown.
Microsoft reports Azure's results under the "Intelligent Cloud" line item, and for the quarter, Intelligent Cloud generated $19.1 billion in revenue, up 26% year over year. While server products sales increased 5%, revenue from cloud services increased a whopping 46%.To put this growth into perspective, CEO Satya Nadella highlighted that the number of Azure deals worth over $100 million more than doubled year over year, and Azure overall is growing across every industry, region, and type of customer.
Perhaps even more impressive is Microsoft's margin profile within Intelligent Cloud. For the quarter, Microsoft's operating income for Intelligent Cloud was $8.3 billion, up 29% year over year. By comparison, Microsoft's two other primary revenue buckets, "Productivity and Business Processes" and "Personal Computing," grew year-over-year operating income by 19% and 7%, respectively.
The expanding margins are providing Microsoft with unparalleled operating leverage. The company ended the quarter with $25.4 billion in operating cash flow, up 14% year over year, and $20.0 billion in free cash flow, up 17%. This cash generation is augmenting the company's already strong balance sheet, which carries nearly $105 billion of cash and equivalents.
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The cloud could be a long-term tailwind
Big tech leaders such as Amazon, Alphabet, and Microsoft all have multibillion-dollar cloud computing businesses. With that said, research suggests that the broader cloud market offers a greenfield opportunity, and that IT leaders have historically underspent on cloud computing protocols. Two primary factors supporting this thesis are the increasing number of remote-work opportunities and the ratcheted-up cybersecurity needs for companies of all sizes.
Last month, Amazon CEO Andy Jassy said during an interview with CNBC that the vast majority of IT spending still revolves around on-premises technology as opposed to cloud-based solutions. However, according to market research firm Gartner, this dynamic is rapidly changing. Gartner estimates that less than one-third of digital workloads are currently hosted on cloud-native platforms, but it predicts that by 2025, 95% of workloads will be deployed on the cloud.
Nadella seemed to echo Gartner's bullish thesis by showcasing that global businesses such as Boeing, Kraft Heinz, and Chevron had all chosen Microsoft Azure as their cloud migration platform in recent months.
As business leaders increasingly rely on real-time data to make decisions, it will be imperative for companies of all sizes to host the data from their various systems within a single, uniform, flexible application. And the need for effective systems to keep this information secure is only becoming more obvious. Over the last couple of years, Microsoft has acquired cybersecurity players CloudKnox and RiskIQ, both of which will be critical integrations in Azure's long-term development. Even with the robust growth it has behind it, Microsoft enjoys several tailwinds in the cloud segment.
Keep an eye on valuation
As of the time of this writing, Microsoft stock was down 22% year to date. This is not entirely surprising. Its big tech and FAANG peers are also trading lower amid the broad sell-off in the tech sector. Microsoft now trades at roughly 10 times its trailing-12-month sales, and 24 times its estimated forward earnings. Although these multiples are both lower compared to their levels over the last year, Microsoft stock has been showing signs of a recent rebound. One of the most important adages to remember as an investor is "Time in the market beats timing the market." Given its latest strong results, the tailwinds of the cloud, and its reduced valuation, Microsoft appears to be a compelling buying opportunity for investors with long-term time horizons.
