Microsoft stock soared nearly 5% in early after-hours trading as the company trounced lowered revenue and profit expectations for its fiscal second quarter and topped $40 billion in quarterly sales and $15 billion in profit for the first time.

Both the cloud and personal computer segments led the growth as surging demand created by the COVID-19 pandemic showed no signs of abating.

Quarterly sales, which are typically strong coming off the holiday season, jumped 17%, to $43.1 billion, while profit rose 34%, to $2.03 a share. Analysts had expected $40.2 billion in sales and a profit of $1.64 a share. Microsoft stock, which languished between $20 and $40 per share for more than a decade, has risen more than fourfold since 2016 and 41% in the past 12 months. It closed today at a record $232.33.

“If this is what the company can deliver amidst lowered expectations, I’d hate to see what it can do in good times,” said Charles King, principal analyst at Pund-IT.

The growth rates the company reported are particularly impressive coming on top of such a large revenue base. That’s especially true when compared with the scant 3% growth in operating expenses the company recorded thanks in part to COVID-related savings.

“The structural change of COVID is that digital technology is becoming essential to core business continuity and to meeting new customer expectations,” said Chief Executive Satya Nadella (pictured). “We benefit from that and it’s more important when I look at the next 10 years.”

Notable was the 48% constant-currency growth the company reported in Azure cloud revenue, compared with growth rates of 48% and 47% in the two previous quarters. Given that Amazon Web Services Inc. reported 29% growth in its most recent quarter, albeit on a much larger base, Microsoft continues to gain on the cloud giant.

Amazon alternative

“They’ve sort of become the preferred alternative to Amazon,” said Andrew Bartels, a principal analyst at Forrester Research Inc. AWS’ strategy, Bartels called “growth at all costs, has meant they aren’t necessarily as consumer-friendly as Azure, which is seen as a less-threatening option.”

Nadella said Microsoft has differentiated Azure with “integration at every layer of the stack, industry solutions leading to time to value, price differentiation, cost advantage and customer agility. That’s what you see in the acceleration around Azure. We see all the parts coming together.”

As is its style, Microsoft issued cautious guidance for the coming quarter. Chief Financial Officer Amy Hood said fiscal third-quarter growth should be in line with the quarter just completed. She said productivity and business process revenue would be between $13.35 billion and $13.6 billion and Intelligent Cloud sales would range from $14.7 billion to $14.95 billion. “With strong performance we expect to deliver another full year of double-digit revenue and income growth,” Hood said.

The company spent $5.4 billion to support growth of its cloud offerings in the quarter, $4.2 billion of which were for property and equipment. Azure led the Server Products and Cloud Services division to 24% revenue growth in the quarter.

Commercial cloud revenue rose 34% from a year ago, to $16.7 billion. Server products and cloud services sales jumped 24% and revenue for the Azure cloud jumped 48% in constant currency.

Unlike its rivals, Microsoft does not break out Azure infrastructure-as-a-service revenue figures. Revenue in the segment it calls its Intelligent Cloud grew 22%, to $14.6 billion, and beat analysts’ expectations of $13.77 billion.

The company also continues to benefit from sales of PCs to homebound office workers. Its More Personal Computing segment grew 13%, to $15.12 billion, beating estimates of $13.47 billion.

The Productivity and Business Services division, which includes the Office suite, grew 11% in constant currency, to $13.35 billion, led by 20% growth in Office 365 commercial revenue and 18% growth in the Dynamics family of enterprise resource planning and customer relationship management applications.

In Microsoft’s case, the rich are only getting richer. Free cash flow grew 17%, to $8.3 billion, giving the company enormous leverage to fund investments and acquisitions.

Few weak spots

It was hard to find any weak spots in the quarterly report. Microsoft’s dependence on sales of its cloud applications to drive cross-sales of cloud infrastructure could be a vulnerability if Office performance slips, but King noted that Office lacks any significant competition. “At this point, Google is the biggest alternative in that space,” he said, adding that “Microsoft also seems to be benefiting from the shift to online communications via its Teams application and service.”

Forrester’s Bartel said one of the few disappointments in the results was Windows commercial OEM revenue, which edged up just 1%. The Microsoft Surface line of PCs and tablets also crept up just 1% in constant currency terms. “Surface was their effort to go after iPad, which is doing a helluva lot better than Surface,” he said.

The implication is that Microsoft “is even deeper into the corporate world than Apple” and is pulling back on its consumer aspirations, Bartels observed. Given that both companies dominate their markets, that still isn’t a bad place to be.

Photo: Village Global/Flickr CC