Microsoft One of the Best Opportunities Today

Rodney Nelson: Wide-moat Microsoft reported third-quarter results that came in well ahead of our expectations as the firm saw strength across all three of its major business lines. This was the first quarter that Microsoft was lapping a fully comparable period including LinkedIn, and those results were stellar across the board. Third-quarter revenue rose 16% year over year to $26.8 billion, roughly $1 billion ahead of our internal estimate. The strength could be realized across productivity and business processes including 42% commercial revenue growth for Office 365 and 1.4 million net new users of Office 365 on the consumer side. On the intelligent cloud front, Azure grew 93% year over year, marking the third straight quarter that the business has grown in excess of 90%. We continue to expect outsize growth for Azure moving forward as we view it as one of the top tier competitors in public cloud infrastructure and platforms of service.

Finally, the business continues to see strong adoption of Windows 10, lifting Windows revenue contributions significantly and staving off longer term secular declines in PC operating systems. The Windows commercial business grew 11% year over year although the consumer business tracked more closely with the PC market, falling 8% year over year.

Overall, we have lifted our longer term revenue assumptions around LinkedIn and Office 365. We have raised our fair value estimate to $117 per share, up from $106 per share previously. We view Microsoft as one of the best investment opportunities in software today as it trades at a sizable discount to our fair value estimate.