The US earnings season has clearly been better than the lowered expectations ahead of it. The consensus earnings forecast “bar” as such had been lowered and the vast bulk of US equities have beaten consensus expectations. This development, combined with the view that the Federal Reserve may even cut interest rates this year, has driven US equities back to all-time highs.
While there’s a lot to digest in the US reporting season due to the vast depth and breadth of the US economy and equity market, today I thought it would be useful to focus on what I thought was one of the standout results from the season.
Microsoft (MSFT) today is the largest company in the world, with a market capitalisation of $1 trillion US dollars. Its business has traditionally been focused on manufacturing, selling, supporting and licencing software products like the Windows Office program, however since Satya Nadella came to the helm as CEO in 2014, the strategy has been to deprioritise Windows (which made the company a household name) and focus on things like Cloud, AI, subscription services and gaming. Commercial cloud has been especially important and has grown at an 85% CAGR since FY13. There’s every chance these trends continue over the next decade as the US continues to digitise its economy (currently only ~30% of US GDP is digitised) and software continues to “eat the world”. MSFT is well positioned in key secular growth trends such as Public Cloud, Machine Learning and the Internet of Things, which should see it move well through the $1 trillion market cap “glass ceiling” in our view.