Matein Khalid
In the winter of 2018 on the eve of a trip to South Africa with my close friends from Roshni, an enclave of some very special people just outside Johannesburg. I had published an article in the GCC/British media (I used to write for newspapers and magazines then) on software stocks (https://lnkd.in/dTgHd9Wp). My analysis convinced me that MSFT was a superlative buy just below $100. Fast forward to now, Mr. Softy just delivered blowout earnings and MSFT now trades at $324 as I write. Sometimes Matty gets the zeitgeist right and sometimes I gets it wrong. But patience is a virtue in the capital markets that I sadly do not possess in my quest for daily financial thrill seeking.
MSFT is now a 10 bagger since Satya replaced Bro Ballmer as the big enchilada of Redmond’s Evil Empire. It is an understatement to call last night’s earnings report stellar. Revenues were $45.3 billion for the quarter, up an incredible 22%. All the major product areas easily surpassed management guidance. Azure growth was up 50%, LinkedIn was up 40% (hopefully I helped in a itsy bitsy infinitesimal way!). I was also impressed by the growth mojo in Office 365, Security Solutions, Xbox, Teams and Windows (despite the PC woes).
The reason I believe this will be the world’s first $3 trillion business is that management’s December guidance just got raised by $2 billion. Intelligent Cloud alone could contribute $18 billion in the next three months, a level of growth and scale that shames even my garma garam pre-IPO software hotties in Silicon Valley. Guidance now means that MSFT will deliver history’s first $50 billion quarterly revenue, a seminal moment in the global IT saga.
I would usually avoid company’s trading at a 4X PEG ratio like the plague because such great expectations are never realized other than outside the reveries of my beloved Charles Dickens. Yet Satya Nadella is no pip even though Ballmer was Magwitch in the era of the bold/bald and the beautiful.
I never thought a company could grow revenues at 22% at a $190 billion run rate but Satya Nadella proved me wrong. This is the testament both to MSFT and the mega trends of digital transformation, cloud computing and cyber security to which I devote my waking hour outside Nasdaq trying to get a grasp on the next 10X venture capital puppy. I believe the valuation rerating in MSFT continues and it is thus the ultimate software self-licking ice cream cone, a fairy tale investment for the cognoscenti and illuminati since no human can possibly run such a profitable digital empire.
I expect MSFT to grossly outperform AAPL in the next two years, a pair trade idea for those who share my rationale. While Satya became the digital maestro of software at MSFT, Arvind Krishna at IBM has proven a total flop. Sad, but true.
Matein Khalid is Chief Investment Officer at Asas Capital
