The Sky Is the Limit

After Netflix (NFLX) laid an egg, the tech sector badly needed a cure to calm the fierce, open waters.

Netflix missed expectations by about a million subscribers and weak guidance shredded the stock almost 15% in aftermarket trading.

The FANG boat started to rock and large cap tech needed a savior to quell the increasingly downside risk to the best performing sector in the market this year.

You can rock the boat all you want, but when Microsoft (MSFT) shows up, the seas turn tranquil and placid.

Microsoft delivered a dominant quarter.

I expected nothing less from one of the best CEOs in America, Satya Nadella, and his magic touch is the main wisdom behind the loquaciousness when the Mad Hedge Technology Letter delves into the Microsoft business.

I rate Microsoft as a top three technology stock, and it should be a pillar of any sensible equity portfolio, unless you believe throwing away money in the bin is rational.

Born in Hyderabad, India, Nadella has worked wonders inheriting the reins from Steve Ballmer who was more concerned about buying an NBA team than running one of the biggest American companies.

Ballmer had Microsoft barreling unceremoniously toward irrelevancy.

It got so bad for Microsoft, the "L word" started to pop up.

Legacy tech is the lousiest label a tech company can be pinned with, because it takes years and gobs of cash to turn around investor sentiment, the business, and the share price.

Under Nadella's tutelage, Microsoft has burst through to another all-time high, which is becoming a regular occurrence in 2018 for Microsoft's shares that languished in purgatory for years.

If the macro picture holds up and if the administration can keep quiet for a few news cycles, investors can expect a minimum of 15% appreciation per year in this name.

And that is a conservative estimate.

Microsoft is already up over 20% in 2018.

Queue the applause.

Nadella has orchestrated a 300% jump in valuation during his four and half years at the helm.

Microsoft is now valued at more than $800 billion and climbing.

The only other tech members of the prestigious $800 billion club are Apple (AAPL), Amazon (AMZN), and Alphabet (GOOGL).

Apple leads the charge to claim the prize as the first trillion-dollar company, and it is within striking distance valued at $951 billion.

Nadella bet the farm on software subscriptions and migration to the cloud.

It was the perfect strategy at the ideal time.

Shares cracked the $108 mark at the market open even as the administration kept up its pugnacious rhetoric threatening to topple the overall market.

Tech has held up through these testy times confirming the fluid migration by the scared investor souls into big cap tech.

How can you blame them?

Amazon prime day saw record numbers visit its platform to the point it crashed from overloading the servers.

Coresight Research predicted users would fork over $3.4 billion on Prime Day in 2018, an increase of 40% YOY.

More than 100 million products were sold in the 36 hours.

The staggering Prime Day sales came on the heels of Alphabet being fined $5 billion for being too dominant in Europe.

The market shrugged it off as the fine does nothing to change Alphabet's dominance in Europe.

Android has harvested 80% of the smartphone market and was slapped on the wrist for bundling Google apps out of the cellophane packaging is a cheap trick by the European regulators.

Imagine frequenting a restaurant that cannot serve its own food.

Alphabet even allows users to download whatever bundle of apps through the Google Play app store. It should be enough.

Alphabet is another solid Mad Hedge Technology Letter pick, albeit it is the weaker tier of the vaunted FANG group and just celebrated all-time highs.

Amazon and Netflix (NFLX) still lead the charge at the top tier of the FANG group, and Facebook's risky business model has it grouped with Alphabet in the lower tier.

At the end of the day, a member of the FANG group is a member of the FANG group.

Microsoft should be part of the FANGs, but the acronyms start becoming too pedantic.

The breadth of the tech sector means many winners.

Microsoft is one of the biggest winners.

Microsoft's total revenue levitated 17% YOY to $30.1 billion.

The number every investor was patiently waiting for were insights into the cloud business.

Microsoft Azure was up 89% YOY and cemented together with strong guidance, ensured Microsoft's shares would continue on its merry way upward.

Gross margins for the commercial cloud offerings, grouped as Azure, Office 365, accelerated to 58% YOY from 52%.

Microsoft's intelligent cloud described by Nadella as "Microsoft's drive to build artificial intelligence into all its apps and services" rose 23% YOY to $9.6 billion.

Management said that it expects Cloud margins to ameliorate through the rest of 2018.

Even the hardware side of the operations caught an updraft with Microsoft Surface, a series of touchscreen Windows personal computers, pole vaulted by 25% YOY.

Simply put, Microsoft is a lean, mean cash-making machine. Last quarter's profit of $8.87 billion coincided with the first time the company eclipsed $100 billion in annual sales.

Microsoft Azure's 16 percent share of the global cloud infrastructure market, according to data by research firm Canalys in April, is rapidly approaching Amazon's Amazon Web Services (AWS) business.

A Morgan Stanley poll of 100 U.S. and European CIOs gleaned insight into the broad-based acceptance of Microsoft's products.

The poll saw 34% planned to upgrade to a higher and more expensive tier of Office 365 software in the next two years, and more than 70% plan to deploy Microsoft Azure and its collection of hybrid cloud solutions.

Microsoft still has its cash cow business injecting healthy profits into its business with Microsoft's productivity and business processes unit, including Office 365, rising 13.1% YOY to $9.67 billion.

The tech sector needs the mega cloud stocks to stand up and be accountable at a precarious time when the macro picture is doing its best to suppress the robust tech sector.

Amazon and Alphabet are in the limelight next week, and Amazon will divulge frighteningly strong cloud numbers along with the braggadocio numbers about its record-breaking Prime Day.

The more I look at Microsoft's last quarter performance, it becomes harder and harder to identify any chink's in Microsoft's armor.

This is not your father's Microsoft.

This is the flashy, innovative Microsoft on top of the most influential trend in the technology sector - the migration to the cloud.

Sticking to this stock could be the rich new uncle of which you've always dreamed. But in this case, it's Satya Nadella providing the free flow of funds.

The spike in the shares is well deserved and any remnant of a retracement should be bought with two hands.

Saying that I am bullish about Microsoft's prospects is an understatement.

 

 

 

 

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Quote of the Day

"Your margin is my opportunity," said founder and CEO of Amazon Jeff Bezos.