Microsoft Becomes No. 2 Market Cap Company in US

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It has been a long road for Microsoft Corp. (NASDAQ: MSFT) CEO Satya Nadella, who took the job in 2014. He had to convince investors that the company had changed radically as it pivoted toward the huge cloud industry. The company’s stock did not react at first but is now 200% higher in five years. It has just passed Amazon.com Inc. (NASDAQ: AMZN) as the second largest company in the United States as measured by market cap.

Each of the two tech giants has a market value of more than $800 billion, behind Apple Inc.’s (NASDAQ: AAPL) $1.05 trillion. Over the past few days, Microsoft’s share price has surged, based on better-than-expected earnings. Amazon’s has fallen because of disappointment in its numbers. Each has taken a very different path to its current valuation, although each is a leader in the global cloud business.

In its most recently recorded quarter, Microsoft’s revenue rose 19% to $29.1 billion over the same quarter a year ago. Net income was $8.8 billion, higher by 34% based on the same comparison. Some of Microsoft’s older businesses continue to perform well. This includes the Windows franchise, its game business, LinkedIn and search. The evolution in revenue showed up in the results of its large cloud service product labeled Azure. This helped drive Intelligent Cloud revenue up 24% to $8.6 billion. Azure revenue was up 76%. Although earnings showed that hardware and games are part of its success, Microsoft remains largely a software-powered company.

Amazon’s results show that its sales still come largely from its e-commerce operations. This includes the success of its online consumer-facing operations, which bundle its large America-based internet retail operation and a similar business overseas. It is further driven by a surge in its Amazon Prime business, which has over 100 million members worldwide. The service includes free shipping on millions of products and Amazon’s successful video streaming operation. The e-commerce business also includes hardware sales, led by its artificial intelligence products for the home, founded on its Alexa software. Amazon has started to market Alexa products to enterprises.

Amazon’s fasting-growing business is Amazon Web Services (AWS), generally recognized as the largest cloud service in the world. AWS sales were negligible five years ago. Today, Amazon’s operating income would be very low without AWS.

In the most recently reported quarter, Amazon’s revenue rose 29% to $56.6 billion. Net income reached $2.9 billion, compared with $256 million in the year-ago period. Revenue at its largest division, which is North American e-commerce, rose 35% to $34.3 billion. Margins for the operation are still low. At $2 billion, operating income for the group was only 6% of revenue.

Investors worry that Amazon’s e-commerce business has always had small margins. Amazon is also committed to hundreds of millions of dollars in future expenditures for original programming to push Prime subscriptions higher.

AWS revenue surged 46% to $6.7 billion. AWS operating income was $2.1 billion, which is a 31% margin. If AWS can hold its lead in global could market share, revenue will continue to grow in mid-double digits. However, the enterprise cloud business becomes more competitive by the day.

Investor judgment is that software sales trump e-commerce and that the cloud business is still a race.