ii view: Cloud and windows upgrades boost Microsoft

The share price is making new highs as investors hear that cloud and windows upgrades are providing a big boost.

Second-quarter results to 30 December 2019

• Revenue up 14% to $36.9 billion
• Net income up 36% to $11.6 billion
• Earnings Per Share (EPS) up 37% to $1.52
• Returned $8.5 billion to shareholders in the form of dividends and share repurchases

Chief executive Satya Nadella said:

“We are innovating across every layer of our differentiated technology stack and leading in key secular areas that are critical to our customers’ success. Along with our expanding opportunity, we are working to ensure the technology we build is inclusive, trusted and creates a more sustainable world, so every person and every organization can benefit.”

ii round-up:

Windows software maker and cloud data centre operator Microsoft (NASDAQ:MSFT) posted sales and earnings which beat analyst estimates in these second-quarter results.

Its Azure cloud computer server business, competing against Amazon (NASDAQ:AMZN) and Google (NASDAQ:GOOGL), again delivered impressive growth. Global demand for data storage has soared as the internet has effectively allowed the outsourcing of corporate data storage. Azure revenue rose by 62%, aided by contract wins from both the US defence department and company Salesforce. 

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Microsoft’s biggest division, Personal Computing, accounting for its Windows, Surface, Xbox and Bing businesses, delivered a 3% revenue increase to $13.2 billion. An 11% drop in sales for content and services for its Xbox product dragged on performance.

But its Productivity and Business Processes division, containing its LinkedIn business, delivered a 17% improvement in sales, helped along by customers upgrading to Windows 10, as it ceased to support the former Windows 7 operating software. 

The shares rose by more than 3% in after-hours US trading. 

ii view:

Seemingly having previously lost its way with Windows phone software, Microsoft has now revived its fortunes. The arrival of the current chief executive in 2014 has had a galvanising effect, providing renewed clarity of purpose. Its move to build on its cloud server business has paid off handsomely. 

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For investors, Microsoft shares have regained their former growth tag, evidenced by a current forward price/earnings (PE) ratio of just over 30, more than 10 points above its 10-year average. The share price rose by more than 50% during 2019 and is currently making all-time highs for fun. 

Shareholder returns, and a dividend payment covered nearly three times by earnings, should also not be forgotten, although dividend income is not what you buy Microsoft for. This well-run tech company gives investors exposure to parts of the economy and industry catalysts that are difficult to find elsewhere. 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
• Returned $8.5 billion in Q2 via share repurchases and dividends

Negatives:

• Political concern regarding the size and power of technologies companies has grown
• Xbox content and services sales down
• Alphabet Google and Apple (NASDAQ:AAPL) are working on their own streaming and subscription services for video games

The average rating of stock market analysts:

Strong buy