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Microsoft Defies Fears With Azure Strength, Guidance

Solid results and guidance hold our fair value estimate stable, and we see shares as undervalued.

Wide-moat Microsoft MSFT reported solid results overall, with revenue and EPS coming in a bit better than we expected despite some existing and new headwinds, such as inflation, a growing currency headwind, a change in licensing practices for on-premises transactional business, worsening supply chain conditions again, the Russian invasion of Ukraine. More importantly, even though the guidance was a hair shy of FactSet consensus on revenue and operating income, we think the outlook should be viewed positively in light of these headwinds. We think digital transformation projects continue to fuel overall demand and we are also encouraged by strength in Azure, which saw tier-one workloads moving to the cloud in the form of larger and longer-term deals than ever before. Microsoft remains impressive in its ability to drive both growth and margins at scale and we think there is more to come on both fronts. We see results as reinforcing our thesis centering on the proliferation of hybrid cloud environments and Azure, as the firm continues to use its on-premises dominance to allow clients to move to the cloud at their own pace. Solid results and guidance hold our fair value estimate stable at $352 per share and we see shares as undervalued.

For the third quarter, revenue grew 18% year over year to $49.36 billion, compared with our model at $49.03 billion and FactSet consensus at $48.98 billion. Results include $111 million in revenue from the Nuance acquisition, which closed March 4, offset by the suspension of sales in Russia, which was a $130 million top-line hit, and a 100 basis point hit from worse-than-expected currency moves. Compared to the year-ago period, Productivity and Business Processes grew 17%, Intelligent Cloud grew 26%, and More Personal Computing grew 11%. All segments were above the midpoint of guidance, if not just above the high end of the ranges provided. Azure grew 46% year over year, aided by tier-one workloads, large deals, and long-term contracts.

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