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Stock Analyst Update

Microsoft Posts Solid Results, Lifting FVE to $352

Microsoft remains impressive in its ability to drive both growth and margins at scale and we think there is more to come on both fronts. We see results as reinforcing our thesis centering on the proliferation of hybrid cloud environments and Azure, as the firm continues to use its on-premises dominance to allow customers to move to the cloud easily and at their own pace.

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Wide-moat Microsoft (MSFT) reported solid results driven by strength in more personal computing, while enterprise related revenues were more in line with our robust expectations. Given the ongoing sell-off in software, we are encouraged by results, which suggest digital transformation-led demand remains intact. Third-quarter guidance was ahead on revenues compared to FactSet consensus as well. Management sees no signals that demand is slowing. Azure remains a bright spot, with Windows and Gaming also performing well. Commercial bookings and RPO were both good and underscore management's confident outlook. Microsoft remains impressive in its ability to drive both growth and margins at scale and we think there is more to come on both fronts. We see results as reinforcing our thesis centering on the proliferation of hybrid cloud environments and Azure, as the firm continues to use its on-premises dominance to allow customers to move to the cloud easily and at their own pace. Quarterly strength and good guidance drive our fair value estimate to $352 from $345 per share and we see shares as undervalued.

For the second quarter, revenue growth was 20% year over year to $51.73 billion, compared with our model at $51.07 billion and FactSet consensus at $50.85 billion. All segments came in near the high end of guidance ranges, except for More Personal Computing, which was $700 million above the top end of the guidance range. Key pillars of our growth narrative from the quarter included year-over-year growth as reported in Azure of 46%, Dynamics 365 of 45%, PowerApps of 161%, and LinkedIn of 37%. Channel constraints appear to be easing, as Surface revenue rebounded to 8% growth, compared to year-over-year declines in the last two quarters and against a difficult comparison. Xbox demand remains strong although supply chain issues continue to limit demand, which we expect to continue over the next several quarters.

 

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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.