Microsoft Reports Material Upside; Raise FVE to $235
A variety of generally minor model refinements drive our Microsoft fair value estimate to $235 from $228 per share. We still see more than 10% upside to this high-quality wide-moat name.
Microsoft (MSFT) continues to actually benefit from coronavirus-related issues, which helped the company drive material upside compared with its revenue and EPS outlook for the quarter. Azure remains strong, while consumer-related revenue was once again nicely ahead of our expectations as the global lockdowns continued this quarter. Importantly, commercial bookings and RPO, two forward-looking metrics, both continue to grow well in excess of revenue. We remain impressed with Microsoft's ability to drive revenue and margins at this scale and we believe there is more to come on both fronts. Results continue to underscore our thesis, which centers on customer adoption of hybrid cloud environments with Azure. Microsoft continues to use its dominant position of on-premises architecture to allow customers to move to the cloud easily and at their own pace, which we believe will continue over the next five years. A variety of generally minor model refinements drive our fair value estimate to $235 from $228 per share. We still see more than 10% upside to this high-quality wide-moat name.
For the September quarter, revenue grew 12.4% year over year to $37.15 billion, compared with our model at $35.90 billion and CapIQ consensus at $35.78 billion. Relative to our expectations, all segments were ahead. However, productivity & business processes, which was driven by consumer Office 365, and personal computing, which was driven by consumer Windows, Surface tablets, and Xbox, were both more than $500 million ahead of our model. As a result of the COVID-19-driven lockdown, the company continues to enjoy general consumer-related strength in both PC-related demand and gaming. Teams now has 115 million daily active users, up from 75 million a year ago. Management also noted 70% of the paid commercial Office user base is now converted to subscriptions. Intelligent cloud remains a key long-term growth driver and saw Azure growth accelerate modestly sequentially to 48% year over year.
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Dan Romanoff does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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