America's Largest Company Is Still Thriving Today

We're beginning to get a better idea of how the coronavirus is impacting businesses... And for most of them, the news isn't good.

So far, more than half the companies in the S&P 500 have reported earnings for the most recent quarter.

A lot of investors are watching how these companies are dealing with the COVID-19 pandemic. Some have suspended forward guidance because they're just not sure how this situation will play out.

Many of the world's best-known companies – including Boeing (BA), American Express (AXP), and Goldman Sachs (GS) – are noting sales declines and other headwinds to their businesses. Some retailers have even been pushed to bankruptcy because of the pandemic.

But that's not the case for today's company...

Microsoft (Nasdaq: MSFT) is the largest public company in America. It boasts a $1.3 trillion market cap. And its business has flourished even amid the coronavirus outbreak.

Microsoft sells software programs, games, applications, devices, and platforms to billions of people in more than 190 countries.

You've surely come across its products...

Among the most widely used are its Windows operating system and its Office suite of productivity software. The Office software includes Excel (spreadsheets), PowerPoint (presentations), Word (word processing), and Outlook (e-mail).

And software is a highly capital-efficient business...

Once the software is developed, it's not expensive to grow it to a large customer base. Microsoft doesn't have to build more factories, acquire loads of raw materials, or hire more workers to grow its operations.

That means Microsoft can easily scale it and operate with thick margins. In the past 12 months, Microsoft has brought in $139 billion in sales. Of that, $95 billion was the company's gross profit. That translates to 68% gross margins.

And Microsoft produces loads of free cash flow ("FCF")...

Remember, FCF is the one metric you can't fake. It's a measure of a company's cash profits minus capital expenditures. (Cash profits are the cash a company generates from its operations. Capital expenditures are the cash needed to maintain equipment and invest in new buildings, equipment, and software.)

Of the $139 billion in sales, $43 billion trickled down to FCF. That comes out to an FCF margin of 31% – meaning that for every $1 in sales, Microsoft produces $0.31 in FCF. That's a great ratio – the average S&P 500 company has an FCF margin of 11%. In other words, Microsoft is producing nearly three times the cash flow of the average company.

And software is about as close to a pandemic-proof business as it gets... Just take a look at Microsoft's most recent earnings report.

In the third quarter, Microsoft reported earnings per share ("EPS") of $1.40, well ahead of the $1.27 estimate.

Incredibly, the company said the COVID-19 outbreak had very little effect on its business. In fact, it made some of Microsoft's products even more valuable.

Take Microsoft's workplace messaging and videoconferencing software, Teams, as an example. Lockdowns to stop the virus's spread have confined people to their homes. With people forced to work remotely, Teams now has 75 million daily active users. That's double the user base it had in early March before the lockdowns, according to CEO Satya Nadella.

Microsoft also saw strong performance beyond its software products...

The company's rapidly growing Azure cloud-computing business reported year-over-year sales growth of 59%. The company cited increased usage because of remote working as a driver behind the growth.

Microsoft also saw record engagement on its Xbox Live video-game platform with 90 million active users, as people needed to find ways to stay busy while stuck at home.

Shares continued their recent rally on the positive earnings news. Since bottoming on March 23, the stock has surged nearly 30%. And it now sits about 8% from its all-time high. The S&P 500 Index, on the other hand, is still more than 15% below its previous highs.

Over the long term, the gains are even more impressive. Microsoft has more than tripled over the past five years, far outpacing the 33% gain for the S&P 500.

Microsoft is one of the world's best businesses. It's highly capital-efficient and has popular, well-known products. And its strength throughout a global pandemic is just more evidence of Microsoft's dominant business.

Sometimes investing is simple.