Analyst Note| Dan Romanoff, CPA |
Microsoft is benefiting from a second wave of digital transformation as well as strength in gaming, which helped the company once again drive material upside compared with its revenue and EPS outlook for the quarter. Guidance for the third quarter was nicely above consensus as well. Azure remains strong, while consumer-related revenue was once again ahead of our expectations as the global lockdowns continued this quarter. Importantly, commercial bookings and RPO, two forward-looking metrics, both continue to outpace revenue growth. We remain impressed with Microsoft's ability to drive revenue and margins at this scale and we believe there is more to come on both 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. Quarterly strength along with upside to guidance and a variety of minor model tweaks drive our fair value estimate to $263 from $235 per share. We still see loosely 10% upside to this high-quality wide-moat name.