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Stock Analyst Update

Microsoft Results Strong, Raising Fair Value Estimate

Solid revenue upside drove better margins for the wide-moat firm.


 Microsoft (MSFT) reported third-quarter results that were ahead of our consensus expectations, with solid revenue upside driving better margins. A slightly lower tax rate helped drive material earnings per share upside. Management offered a bullish stance on the call, repeatedly saying that various metrics were ahead of plan. Overall, results continue to reinforce our thesis, centering 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. Adoption of cloud services in the form of software as a service, platform as a service, and infrastructure as a service remains robust for Microsoft, and the company has passed inflection points where cloud revenue is strong and margins continue to improve. We maintain our wide moat rating and are raising our fair value estimate to $143 per share from $125 after increasing our revenue growth and margin assumptions. The shares have had a strong run year to date, and we are incrementally more cautious on near-term valuation.

For the fiscal third quarter, revenue grew 14% year over year to $30.6 billion, while EPS was $1.14 compared with a $0.95 a year ago. Intelligent cloud and more personal computing were ahead, while productivity and business processes was slightly light.  Revenue growth in the intelligent cloud segment, which contains Azure, accelerated year over year for the 10th consecutive quarter, which is good, but given the law of large numbers and a difficult comparison, we expect this to end in the June quarter.  Still, on-premises server results were strong in the face of 73% growth of Azure growth. The chipset shortage noted last quarter eased, allowing Windows to come in ahead of expectations

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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.