ii view: a large cloud is great news for Microsoft

by Keith Bowman from interactive investor |

Share on:

An old name in tech terms, but a company still delivering impressive growth. 

First-quarter results to 30 September 2020

  • Revenue up 12% to $37.2 billion
  • Net income up 30% to $13.9 billion
  • Earnings Per Share (EPS) up 32% to $1.82
  • Returned $9.5 billion to shareholders in the form of share repurchases and dividends, up 21%

Chief executive Satya Nadella said:

“The next decade of economic performance for every business will be defined by the speed of their digital transformation. We are innovating across our full modern tech stack to help our customers in every industry improve time to value, increase agility, and reduce costs.”

ii round-up:

Windows software maker Microsoft (NASDAQ:MSFT) delivered forecast-busting results, driven by demand for its cloud server data products as populations globally continued to work from home through the pandemic.

Azure cloud sales grew by 48%, beating both Wall Street estimates and growth of 47% in the prior quarter, with overall revenues at $37.2 billion exceeding forecasts nearer to $36 billion. But management estimates for the current second quarter proved marginally shy of analyst hopes.

Microsoft shares fell around 2% in post results after-hours trading having gained over 1% earlier in the day. Its shares for the year are up more than a third. Shares for cloud data rivals Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL) are up 77% and 20% respectively in 2020. 

Sales for its personal computing business also continued to benefit from changes to working and leisure practices under the Covid virus. Demand for its Surface products increased by 37%. Sales of Xbox games content and services spiked by 30%. Overall personal computing revenue climbed by 6% to nearly $12 billion. 

Daily users of its Teams messaging and collaboration software rose to 115 million from 75 million in April. For its Dynamics 365 product, which competes with Salesforce.com (NYSE:CRM), revenue grew by 38%.

Management’s mid-range estimate for revenues in the second quarter ending in December is to reach $39.95 billion, just short of Wall Street hopes of just over $40 billion. That said, broker Morgan Stanley, and allowing for the disappointment, still upgraded its full-year earnings estimate by around 3% - raising its target price from $245 to $249 per share. 

ii view:

Under new chief executive Satya Nadella, Microsoft has regained its former vigour. The mistakes of Windows phone software are now comfortably behind it. The software giant’s move to build on its cloud server business has paid off handsomely, and its commercial cloud business surpassed $50 billion in annual sales in its last financial year.

For investors, some headwinds remain. Sales of its OEM windows product, where the license cannot be moved to another PC, fell by 5%. The debate over valuations for tech sectors is also ongoing. But exposure to growth in cloud computing and its position as the world’s dominant business software windows, makes Microsoft a potent force. For many investors it remains a must-own stock.

Positives: 

  • Its Windows operating system holds a dominant market position
  • More than 95% of Fortune 500 companies run their business on its cloud

Negatives:

  • Political concern regarding the size and power of technologies companies has grown
  • Forward price earnings ratio (PE) comfortably above the 10-year average

The average rating of stock market analysts:

Strong buy

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

get more news and expert articles direct to your inbox
Sign up for a free research account and get the latest news and discussion, and create your own Virtual Portfolio