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Microsoft Earnings: AI Steals the Show as Azure Shines

Fair value estimate for the stock raised to $420 after strong results and raised revenue growth and margin estimates.

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What We Thought of Microsoft’s Earnings

Wide-moat Microsoft MSFT continues to impress with solid second-quarter results, including upside on both the top and bottom lines. Even though management will not admit as much, we continue to see indicators that the demand environment has improved at least modestly. Artificial intelligence stole the show again this quarter as it contributed 600 basis points to Azure growth, twice the contribution from just last quarter, and helped land larger and longer-term Azure deals. Azure growth, then, was also meaningfully better than expected. We also find Microsoft’s outlook encouraging, especially for Azure. These factors drive us to raise our revenue growth and margin estimates by approximately one point each over the next five years, which increases our fair value estimate to $420 from $370. Despite this increase, we see shares as fairly valued.

We see results as reinforcing our long-term 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. We center our growth assumptions around Azure, Microsoft 365 E5 migration, and traction with the Power Platform for long-term value creation. We also see AI contributing more meaningfully and more quickly to results.

For the December quarter, revenue grew 18% year over year as reported, or 16% in constant currency, to $62.02 billion, compared with the midpoint of guidance of $60.90 billion. We calculate Activision added about 400 basis points to growth. Relative to the year-ago period, as reported, productivity and business processes grew 13%, intelligent cloud grew 20%, and more personal computing grew 19%. Compared with guidance, both PBP and IC came in above the high end, while MPC was in line with the high end. Good sales execution, a hallmark of this management team, helped drive strong renewals once again.

Microsoft Stock Price

Data as of Source: Morningstar Direct.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Dan Romanoff

Senior Equity Analyst
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Dan Romanoff, CPA, is a senior equity research analyst on the technology, media, and telecommunications team for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers software.

Before Joining Morningstar in 2019, Romanoff spent 12 years in buy-side equity research covering the technology and telecommunications sectors, most recently at Holland Capital Management. Prior to that, he spent five years in sell-side equity research as an associate analyst at UBS and a senior analyst at Credit Suisse covering various areas within technology, including hardware, software, and semiconductors. Romanoff also has worked as an auditor and in valuation services for major public accounting firms.

Romanoff holds a bachelor’s degree in accountancy and a Master of Business Administration in finance, both from the University of Illinois at Urbana-Champaign. He also holds the Certified Public Accountant and Accredited in Business Valuation designations.

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