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Stock Analyst Update

All Segments Ahead for Microsoft

We are raising our fair value estimate for this wide-moat firm after an impressive first quarter.

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Despite COVID-19 macro concerns, Microsoft (MSFT) continued its string of impressive quarters, with meaningful upside to revenue, operating margin, and EPS. Microsoft experienced some dislocation, highlighting that it was seeing pressure in the hardest hit industries (travel, hotel, restaurant, etc.) and SMB, which was offset by an uplift in other areas, notably Microsoft 365, including Teams, gaming, and Azure. The company was focused on meeting immediate customer needs during a challenging situation. 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. We modestly lowered our near-term estimates while making some minor long-term adjustments, which result in a 6% increase in our fair value estimate to $196 per share. We see loosely 10% upside to this high-quality wide-moat name. Importantly, we view results and guidance as constructive for the broader software group.

For the March quarter, revenue grew 15% year over year to $35.0 billion, compared with our model at $34.6 billion and CapIQ consensus at $33.7 billion. All three segments were ahead of our model. Notably, Microsoft originally guided to $10.75 billion to $11.15 billion in revenue for the More Personal Computing segment, which it later pulled because of supply chain issues related to the pandemic in China.  Ultimately, the company still came in slightly better than the midpoint of that original guidance as a result of a spike in work-from-home usage and gaming. Intelligent Cloud continues to drive the narrative, with Azure posting 59% year-over-year growth.

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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.

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