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Clouds over Seattle. Flickr photo via Dan Hershman.
Clouds over Seattle. Flickr photo via Dan Hershman.

I’ve been an equity analyst or portfolio manager since 1987. I’ve covered the tech sector exclusively since 1992, so, yes, I’ve seen ‘em come and go. I started this gig even before the PC era.

Recently, Seattle tech stalwarts and Microsoft reported their quarterly financial results. Of course, investors were pleased with what they read — or heard — because these stocks rose in response, a respective 6 percent and 10 percent.

What gives?

Neither company particularly wowed analysts with headline sales or earnings. Momentum in cloud computing is what moved the needle at Amazon and Microsoft. In fact, these two companies have pivoted to the cloud and are vying for the heavyweight title — each with about $8 billion in such annual run rate revenues.

The Amazon Way

I’ve followed almost every Amazon quarterly financial conference call since the company went public in 1997. I didn’t coin the term, but “profitless prosperity” has been the story here until recently.

In Amazon’s seemingly never-ending land grab, the company has increased sales at a torrid pace, but that hasn’t transferred to earnings growth. In fact, almost every quarter the company guides to operating breakeven plus or minus.

Jeff Bezos of Amazon was in the news a lot in August.
Jeff Bezos of Amazon was in the news a lot in August.

Last year, the stock was crucified. It was down 22 percent in a year the S&P was up 11 percent (S&P 500 price-only return). Investors were frustrated with the company; and CEO Jeff Bezos didn’t seem to care.

As the firm’s largest shareholder, he’s insulated from shareholder activists who shake up other companies, even large ones. In an interview with Business Insider’s editor-in-chief Henry Blodget — note that Bezos has a stake in that publication — he crowed about how little time he spends with institutional shareholders.

That’s like a university president saying that she doesn’t speak with alumni and other donors about raising money. To many executives, that’s the job.

In the June quarter, the company posted revenues for Amazon Web Services (AWS) for the first time. In the period ended September, AWS sales were up 78 percent year-to-year to $2.1 billion, or $8.3 billion annualized.

Better yet for a skinny margin legacy e-commerce company, the segment’s operating margin was 25 percent. Now this is the story: The growth of AWS, its cloud leadership, and Amazon’s unveiling it in its financial filings.

Taking a look at Microsoft

In my view, Satya Nadella was a brilliant pick last year to be Microsoft’s CEO. Microsoft had been talking to Qualcomm’s #2, Steve Mollenkopf and retiring Ford chief Alan Mulally. I don’t know how the former would’ve worked out — although Qualcomm has sputtered under his leadership since he was promoted to CEO to cut off Microsoft — but I’m pretty sure that the 70-year old, manufacturing-oriented Mulally would’ve been a poor choice for a 20th century technology leader overdue for a 21st century business transition.

Satya Nadella and Amy Hood have transformed Microsoft

Of course, Nadella — and CFO Amy Hood who deserves some credit for this — has pivoted Microsoft to the cloud and its stock has soared as a result.

In fact, the shares are trading close to their December 1999 dot-com bubble high, despite the company’s legacy PC-related business struggles as global industry units continue to slide.

Like Amazon, Microsoft only attracted investors’ attention again after it was recognized as a cloud leader.

Microsoft’s stock was a poor performer during Steve Ballmer’s 14-year reign as CEO. From January 1, 2000 to February 1, 2014, Microsoft’s shares fell 32 percent whereas the market rose 24 percent. That was the penalty for clinging to client/server technology.

Right now, we’re playing a “Perception Game.”

In their latest quarters, cloud revenues were less than ten percent of the total for Amazon and Microsoft. For Amazon, its cloud business is more profitable than its e-commerce franchise.

For Microsoft, the cloud business may be less than its legacy business.

But it doesn’t really matter.

When you read these companies’ quarterly financial press releases, look for AWS, Office 365, Microsoft Azure, and Microsoft Dynamics CRM. We’re all busy, so save yourself some time.

Previously on GeekWireMicrosoft CEO Satya Nadella on the battle over the cloud: ‘It’s a Seattle race’

Paul Meeks has been an equity analyst or portfolio manager since 1987. He exclusively has followed the tech sector since 1992. He managed over $7 billion in tech funds for Merrill Lynch Investment Managers during the Net Bubble. He now covers tech companies and is the portfolio manager for the Sextant Growth Fund (SSGFX) and the Saturna Sustainable Equity Fund (SEEFX) at Saturna Capital in Bellingham. He’s at or 360-594-9900 x614. Meeks owns AMZN & MSFT in Saturna client portfolios. I nor anyone who is within my family owns either stock. Our portfolio managers are prohibited from owning individual securities. The bulk of our investible assets are in the funds that we manage.

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