Microsoft: Transforming Into Emerging Cloud Play

| About: Microsoft Corporation (MSFT)
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Microsoft delivered solid earnings results and continues to deliver under its new CEO.

It two cloud businesses are showing explosive growth that does not seem to be properly appreciated by the market.

The shares represent a compelling long-term value at these levels and the company seems to be moving in a good direction under new leadership.

Microsoft (NASDAQ:MSFT) reported earnings after the bell on Thursday. The company delivered earnings of 68 cents a share, a nickel a share above consensus. Revenues came in at expectations and Microsoft provided conservative forward guidance.

Commercial Licensing (50% of overall sales) which includes Windows and Office grew revenues by a solid 10% Y/Y in the quarter. In addition, Microsoft's unearned revenue balance rose 14% Y/Y in the quarter to $19.5B, topping guidance and exceeding last quarter's 12% clip. The company also announced a nice deal with AOL to make its brands to be available on MSN and Bing Apps for Windows and Windows Phone

A solid quarter overall. I want to spend this article discussing the company's growing "cloud" businesses. First, because this is where the company is heading under its new CEO. During the conference call, Satya Nadella used the word "Cloud" much more than mentioning "Windows" even though it is a much smaller part of the business currently.

Second, the division that houses the cloud business for the first time almost reached 10% of overall revenues. In addition, the company is showing explosive revenue growth for both its cloud businesses, Azure & Office 365. Microsoft's web services division ("Azure") grew sales ~150% Y/Y in the quarter.

Office 365 saw revenues double Y/Y in the quarter. This subscription business also added 1mm new subscribers during the quarter and overall subscription numbers now stand at 4.4mm members. It is important to remember, these numbers do not include any new subscriptions from making Office apps available to iPad users recently.

PowerPoint, Excel and Word continue to be best-selling apps via iPads since they were released and they were downloaded over 10mm times in the first week they were enabled. This bodes well for accelerating subscription growth for Office 365 in the quarters ahead.

Finally, I don't think most investors are giving Microsoft much credit for its fast growing cloud efforts. This division is growing at a ~$8.5B annual sales rate now and is showing exponential growth in its two main cloud drivers. To put it in perspective, the largest cloud software play Salesforce (NYSE:CRM) is growing revenues in the 25% to 30% range and is valued at over 8x trailing sales.

If one applies the same price to sales metric to Microsoft Cloud business - even though it's growing much faster - gives the "cloud" business an almost $70B market capitalization if it was a standalone entity and was given the same valuation based on sales as the leader in the space. This would equate to over 20% of its overall market capitalization at current price levels. Add in the company's ~$70B net cash & marketable securities hoard and 40% of its market capitalization is basically "cloud" and "cash."

Removing cash from the equation and MSFT goes for ~12x trailing earnings, a better than 25% discount to the overall market multiple. Add in a 2.8% dividend yield that will probably see another dividend hike by the end of the year as well as a fast growing cloud product line, and the shares seems like a very good bargain in this market. The stock has advanced some 8% since new leadership came into place and I am becoming more encouraged by each month that the company is moving in a better direction. I plan to add shares on any major dips in the overall market just as I have been since picking up my initial stake in the mid $20s approximately two years ago. ACCUMULATE

Disclosure: I am long MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.