We are only in the first few weeks of tech earnings, but we have already learned a lot. Taiwan Semiconductor Manufacturing Co. Ltd. (NYSE: TSM), the largest semiconductor manufacturer in the world continues to ramp up production as the semiconductor shortage extends, Zoom Video Communications Inc. (NASDAQ: ZM) beat earnings by a wide margin, showing us that they are not just a work from home stock and Tesla Inc. (NASDAQ: TSLA) nearly doubled its sales over last year.
While there are dozens of companies set to report earnings today, I’m focused on three of the largest companies in the world with a combined market cap of over $6.5 trillion or 18% of the S&P 500 market cap. Apple Inc. (NASDAQ: AAPL), Alphabet Inc. (NASDAQ: GOOGL), and Microsoft Corp. (NASDAQ: MSFT) will be a guide for the rest of the market and we could see another strong quarter of earnings as retail investors continue to pour more money than ever before into the market. In fact, you can see below, that since mid-2020 retail investors are putting billions of dollars to work.
But one of these big tech stocks is my main focus given the level of innovation they have had over the last year along with its recent announcements.
That company would be Microsoft, and while they are already up 32% this year, they continue to have a long runway with their products as digitization continues across the globe in the wake of the pandemic.
Microsoft is at the heart of an interconnected world and will continue to see revenue tailwinds on multiple fronts. Its Azure cloud platform grew revenue by 50% year over year and Xbox hardware revenue grew 232% over the same time period. Teams has even grown to over 145 million daily active users, almost double the number a year ago as of last quarter.
These megatrends are not even close to slowing down as workloads shift to the cloud and Microsoft’s technology becomes entrenched in our lives. According to the most recent Morgan Stanley CIO survey, only 23% of workloads are running in the cloud today. That means there is a huge runway for services like Azure.
In fact, this overwhelming and unstoppable trend is having an impact across the entire high-tech economy. As 5G wireless internet connections become more and more common, the move towards the cloud will only become easier and easier for companies.
That’s going to be good news for Microsoft, and any other company that provides cloud-based services. I don’t have time to go into too much detail, but I can tell you more about that right here.
Microsoft has been firing on all cylinders and at least in the last few months, they have made huge announcements. Those include the upcoming release of Windows 11 and Windows 365 Cloud PC that will allow users to access their computer from any device.
They have exceptional optionality in their business and with a huge cash position of over $100 billion, they can invest in its cloud transition and strategic initiatives like artificial intelligence and augmented reality technology. Just look at the huge AI acquisition they made earlier this year in Nuance for $16B.
Wall Street expects revenue to be $166.3 billion for the year of which they have already generated $122 billion. This means that to meet topline estimates, they need to generate $44.3 billion or 16% above last quarter.
In summary, I see strong growth from gaming, Azure, and its 365 suite of products, and the tailwinds of the digital transformation will continue to be a catalyst for years to come.
With the bar set high, I have no plan of sitting on the sidelines as we have recommended Microsoft many times over the last few years. Momentum has been strong for mega-cap tech stocks and given the tailwinds, they should be set up for success.
Cheers and good investing,
Michael A. Robinson