Skip to Content
Stock Analyst Update

Microsoft Delivers Flawless Third Quarter

We’re raising our fair value estimate for the wide-moat firm and view shares as attractive.


Wide moat-rated  Microsoft (MSFT) reported third-quarter results that came in far ahead of management’s prior guidance and our expectations, as the company saw strong growth across each of its key product franchises. On the cloud front, Azure delivered its 15th consecutive quarter of triple-digit premium services growth, while Office 365 commercial revenue grew 42% in the quarter. 

Management also continues to execute on its LinkedIn integration, as the business is seeing accelerating revenue growth and improving profitability. CFO Amy Hood provided strong fourth-quarter guidance and offered an initial outlook for fiscal 2019 that signaled continued strength across Microsoft’s most important products, including double-digit growth in Productivity and Business Processes and consistent gross margin expansion in the firm’s cloud businesses.

After accounting for this outlook and baking in greater Office 365 and LinkedIn revenue growth long term, we are lifting our fair value estimate to $117 per share from $106 previously, and we continue to view the shares as attractive.

Third-quarter revenue rose 16% versus the prior-year period to $26.8 billion as the firm lapped a full quarterly contribution from LinkedIn for the first time. Not only is Microsoft generating elevated, sustained top-line growth, but we are beginning to see scale efficiencies enter its cloud businesses, yielding uplift in profitability. Commercial cloud gross margins (which includes Azure, Office 365, Dynamics 365, and Enterprise Mobility Suite) expanded 600 basis points year-over-year and 200 basis points sequentially to 57%, while consolidated operating margins expanded nearly 200 basis points to 30.9%. Management anticipates the firm will continue to see Commercial Cloud gross margin gains continue in fiscal 2019, and we forecast gross margins expanding roughly 50 basis points to 65%.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

Rodney Nelson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.