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Stock Analyst Update

Microsoft Crushes Quarter

We bumped our growth and margin assumptions up throughout our model and as a result, raise our fair value estimate to $185 from $155.

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Microsoft (MSFT) continued its string of impressive quarters, with meaningful upside to revenue, operating margin, and EPS. Demand was broad based across segments and geographies. We remain impressed with Microsoft's ability to drive revenue and margins at this scale and we continue to believe there is more to come on both the revenue and margin 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. Adoption of IaaS, PaaS, and SaaS cloud services remains robust and continues to outperform our expectations from both a revenue and margin perspective. As such, we bumped our growth and margin assumptions up throughout our model and as a result, are raising our fair value estimate to $185 from $155. We believe Microsoft is firing on all cylinders and see further upside to shares if the company can continue to deliver results like those reported for the second quarter.

For the December quarter, revenue grew 14% year over year to $36.9 billion, while GAAP EPS was $1.51 compared with $1.08 a year ago. Both measures were ahead of our in-line estimates of $35.7 billion and $1.31, respectively. All three segments were ahead of our model. Intelligent cloud continues to drive the story, with Azure accelerating sequentially to 62% year over year growth--a positive surprise for the most crucial element of the company’s growth. On-premises server units remain strong and continue to benefit from strong upgrades ahead of product sunsetting, which we do not see as sustainable. Operating margin was 37.6%, up 600 basis points year over year driven largely by rapidly improving gross margin in commercial cloud. Upside to revenues, better gross margins, and controlled operating expenses resulted in significant EPS upside.

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Dan Romanoff, CPA does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.