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Stock Analyst Update

Robust Quarter for Wide-Moat Microsoft

The firm's first-quarter 2019 results continue a trend of broad-based strength across businesses.


 Microsoft (MSFT) reported another phenomenal quarter, exceeding both our earnings and revenue assumptions, and we are maintaining our $130 per share fair value estimate and wide moat rating. The past few quarters, we have witnessed broad-based strength across each of Microsoft’s businesses, propelled by Azure, Office, and LinkedIn, but supported by Xbox & Gaming, Surface, and Dynamics. Microsoft’s first quarter of fiscal 2019 continued that trend. We saw each of Microsoft’s segments (productivity & business processes, intelligent cloud, and more personal computing) outperform in terms of revenue, with all three growing at double-digit rates of 19%, 24%, and 15%, respectively. Microsoft shares continue to trade in 4-star territory, and the broader sell-off before earnings makes the name attractive.

Overall, Office 365 growth remains healthy as we saw 36% growth for the quarter on the commercial side. Previous Microsoft management had stated that at the end of 2017, 50% of Office users had transitioned from on-premises office to the cloud-based Office 365, with the goal to move toward two thirds by the end of fiscal 2019.

Microsoft Azure demonstrated growth of 76% year over year, which tracks exactly in line with our 76% expected growth for fiscal 2019. We have highlighted that Microsoft’s best advantage in the public cloud market is that it is not a direct competitor to its customers (unlike Amazon). We believe Satya Nadella has positioned Microsoft as an enterprise partner, and we think Microsoft’s Azure deal with Walmart (in the summer of 2018) underscores the firm’s ability to grow in the cloud.

LinkedIn demonstrated revenue growth of 33%, but what is more important in our mind is the firm’s 34% increase in sessions engagement, which equates to record engagement and job postings.

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William Fitzsimmons 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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