ii view: Microsoft reports robust results

Growing its cloud business and looking to buy ‘Call of Duty’ game maker. We assess prospects.  

Second-quarter results to 31 December 

• Revenue up 20% to $51.7 billion
• Net income up 21% to $18.8 billion
• Earnings Per Share (EPS) up 22% to $2.48
• Returned $10.9 billion to shareholders, up 9%

Chief executive Satya Nadella said:

“Digital technology is the most malleable resource at the world’s disposal to overcome constraints and reimagine everyday work and life. As tech as a percentage of global GDP continues to increase, we are innovating and investing across diverse and growing markets, with a common underlying technology stack and an operating model that reinforces a common strategy, culture, and sense of purpose.”

ii round-up:

Windows software maker Microsoft (NASDAQ:MSFT) reported forecast beating second-quarter earnings as sales for its cloud data storage business rose by almost a third from last year. 

Earnings per share of $2.48 beat analyst estimates of nearer to $2.30, with the technology giant predicting sales of between $48.5 billion to $49.3 billion in the current third quarter, exceeding hopes closer to $48.2 billion. 

Microsoft shares rose marginally in after-hours US trading, having fallen by more than 10% year-to-date as investors continue to assess prospects given elevated inflation and expected interest rate rises. Shares for rival cloud business operates Alphabet (NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN) are down by around 12% and 16% respectively. The tech heavy Nasdaq Composite index has fallen by 14.5% year-to-date. 

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Microsoft’s latest results follow its recent takeover bid for ‘Call of Duty’ game maker Activision Blizzard (NASDAQ:ATVI) worth $68.7 billion., the largest potential deal in its history if approved by regulators. 

Sales for its personal computing business containing its gaming Xbox unit rose 15% to $17.5 billion. Xbox content and services revenues climbed 10% during the period. A little over a year ago it launched its Xbox Series X and Series S consoles.

Continued corporate demand for cloud data storage services helped its cloud business overall report sales of $22.1 billion, up of 32% from Q2 last year. Overall Microsoft quarterly revenue of $51.7 billion beat forecasts nearer to $50.9 billion.  

Broker Morgan Stanley reiterated its "overweight" stance following the results, upping its estimated fair value price per share to $372 from $364. 

The Washington state headquartered tech giant returned $10.9 billion to shareholders in the form of share repurchases and dividends during the quarter. Up nearly a tenth compared to Q2 2021. 

ii view:

During its last full financial year to late June, revenues were split relatively evenly between its core areas of cloud data, personal computing and productivity and business processes at around one third each. Geographically, sales are split half and half between its home US market and overseas. 

For investors, Microsoft’s failed previous venture in mobile phone software has arguably left it void of the most important consumer computing device of all, the mobile phone. That arena is now dominated by both Apple (NASDAQ:AAPL) and Alphabet. The debate over appropriate tech valuations continues to bubble, and stretched government finances globally due to the pandemic and pressured consumers could see governments raise corporate taxes in future. 

That said, continued domination of the corporate software arena leaves Microsoft as a potent force. During this latest quarter, it launched Windows 11, which gives Microsoft access to corporations to sell its other services such as cloud data storage and security requirements. Its Xbox console and the potential takeover of Activision Blizzard give it significant and potentially growing consumer exposure. In all, and with the consensus analyst estimate of fair value per share sat at over $370 per share, this technology mammoth still looks to be one to own for the long term. 

Positives: 

• Windows operating system holds a dominant market position
• Growing cloud business

Negatives:

• Political concern regarding the size and power of technologies companies remains
• Estimated forward price earnings ratio (PE) comfortably above the 10-year average

The average rating of stock market analysts:

Strong buy