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Race To $1T: Why Amazon Will Beat Microsoft By 5 Months


Microsoft CEO Satya Nadella (L) and Amazon CEO Jeff Bezos chat during an American Technology Council roundtable at the White House in Washington, DC, on June 19, 2017. NICHOLAS KAMM/AFP/Getty Images

Should you bet on the rider (a company’s CEO) or the horse (the company’s strategy)? That’s a key questions for those who want to profit from buying stocks.

The right answer is complicated because of the interaction between the two. But if you compare two Seattle-based companies, Amazon and Microsoft, the answer is bet on the rider. In the case of Amazon you are betting on the rider who created the horse; whereas for Microsoft you’d be betting on the rider who healed the horse that its previous rider badly wounded.

Which brings us to the question of which company is likely to win the horse race to reach a market capitalization of $1 trillion. And the answer to that is that 24-year-old Amazon is going to beat the 43-year-old Microsoft by five months.

(I have no financial interest in the securities mentioned in this post).

Before getting into that, let’s look at Microsoft’s boffo earnings report for the quarter ending June 2018. Microsoft beat expectations for revenue and profit. Sales of $30.1 billion rose 17% and exceeded by $900 million estimates of analysts surveyed by Bloomberg while earnings per share of $1.14 were six cents higher than analysts estimated.

Microsoft also boosted guidance. According to the Wall Street Journal, chief financial officer Amy Hood gave Wall Street analysts a strong outlook for the current quarter in segments that include Azure and Windows — beating Wall Street’s expectations and sending Microsoft stock up to a record $108 after hours.

Two Microsoft businesses contributed to the upside surprise: Its cloud and PC software businesses. In the fourth quarter, Intelligent Cloud revenue popped 23% to $9.61 billion — while Azure revenue soared 89% — a slowdown from 93% in the previous quarter.

The Journal reported that revenue in its More Personal Computing segment increased 17% to $10.81 billion thanks to a rise in corporate PC orders in anticipation of Microsoft’s plan to stop supporting Windows 7 in 2020, according to Gartner and IDC.

With such a strong performance, why will Amazon beat Microsoft to $1 trillion in market capitalization? Two reasons: greater size and faster growth. Amazon’s July 19 market capitalization was $879 billion and the stock has been growing at a 77% rate in the last year; whereas Microsoft’s market capitalization of $802 billion grew at a 44% rate.

If those rates continue — it’s unknowable whether that is a good assumption — Amazon will get to $1 trillion market capitalization by October 2018 while Microsoft will take until March 2019 to reach that nice round number.

As I noted in my book, Disciplined Growth Strategies, our capitalist system rewards people like Amazon CEO Jeff Bezos — net worth $149 billion, according to FORBES, who create marvelous horses and ride them at revenue growth rates exceeding 20% even as their revenues top $100 billion – than it does new riders who bring old horses back to life.

Bezos is worth a hefty 1,088 times more than Microsoft CEO Satya Nadella — who created Microsoft’s cloud business and fixed its culture when he took over.

Nadella owns 2,936,039 Microsoft shares worth about $317 million in July 20 pre-market. As I wrote in April, his cultural transformation helped boost revenue growth because customers became persuaded that Microsoft put their best interests above that of pushing Windows onto them as his predecessor Steve Ballmer had done.

Much of the investment potential of these two companies depends on the growth of the cloud and their relative market share — and the cloud, an industry which Amazon created, keeps growing fast and Amazon maintains a dominant position.

But the numbers suggest that Microsoft is a considerable threat to Amazon. The core cloud industry — which supplies “the foundation layer of computing and software,” according to the New York Times – generated $60 billion in annual revenue and grew 50% in the first quarter of 2018, according to Synergy Research Group.

To keep up with this growth, the biggest players are spending “up to $10 billion a year on their global networks of data centers,” according to the Times. But Amazon has been holding onto its 33% market share since 2015 during which time Microsoft’s share rose from 7% to 13%.

Surveys of customer chief information officers by both Morgan Stanley and Sanford C. Bernstein published in the past month show more companies signing up for or planning to use Microsoft’s cloud products, according to Bloomberg.

A Morgan Stanley poll of 100 U.S. and European CIOs found that 34% planned to buy a more expensive tier of Office 365 software in the next one to two years and 70% were or were planning to use Azure. Bernstein found that as of June 2018, 62% of CIOs said they used Azure  (an increase from 50% about a year earlier) while 60% used Amazon Web Services, noted Bloomberg.

It seems that these days investors put a higher value on growth than they do on profitability.

After all, Amazon stock is rising faster despite lower profitability and a much higher price/earnings ratio. While Amazon — which is expected to report results for the quarter on July 26 — grew revenue 46% in the first quarter, its net margin is 2% and its price/earnings ratio is a whopping 262, according to Morningstar.

Meanwhile, Microsoft’s revenues rose a relatively paltry 17% but its net margin is 24% and its price/earnings ratio is a high, but more modest 96, Morningstar reports.

While both companies are doing well, If I had to choose one, I’d go with Amazon.

Race To $1T: Why Amazon Will Beat Microsoft By 5 Months Race To $1T: Why Amazon Will Beat Microsoft By 5 Months Reviewed by mujeeb Olagunju on July 22, 2018 Rating: 5

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