Is this ‘peak Microsoft’ or can the shares keep rising?

On a steady upward trend for years now, there’s a debate about whether or not the glory days are over.

The digital adoption trends behind the $2 trillion valuation of Microsoft (NASDAQ:MSFT) are “accelerating” and “just the beginning” after the company revealed better than expected earnings last night.

Demand for its Azure data warehouse services, cloud-based versions of Office software and the Teams communication platform were among positive factors driving earnings per share (EPS) in the third quarter up 39% to $1.95 a share, compared with Wall Street's $1.78 estimate.

Shares have surged 50% in the past year to a record level above $260, with Microsoft one of several big tech firms to benefit from the digital trends being hastened by the pandemic.

Investors last night took the opportunity to take profits following the strong run, but the losses in after-market trading were limited to 2.5% following bullish comments from management.

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Chief executive Satya Nadella said: “Over a year into the pandemic, digital adoption curves aren't slowing down. They're accelerating and it's just the beginning.

“We are building the cloud for the next decade, expanding our addressable market and innovating across every layer of the tech stack to help our customers be resilient and transform.”

Analysts at Morgan Stanley moved their earnings per share forecasts higher following the results amid their increased confidence in the durability of the company's growth.

They also increased the Wall Street bank's price target up to $300 from $290 and said robust forward indicators pointed to further market share gains, particularly with chief information officers citing Microsoft as the vendor most often used when consolidating data into the cloud.

In a market also featuring Amazon Web Services and the Alphabet-owned Google Cloud, Microsoft said its Azure cloud computing business grew revenues by 50% in the quarter. Across the company's intelligent cloud unit, sales of $15.1 billion (£10.9 billion) were slightly ahead of estimates.

The personal computing division, which includes the Xbox gaming console and the Windows operating system, revenues of $13 billion (£9.35 billion) were ahead of expectations for $12.5 billion (£9 billion). Morgan Stanley said significant investment in content had made the company the “Netflix of Gaming”. 

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Addressing the question of whether Wall Street is now at “peak Microsoft”, the bank said a price/earnings growth multiple of 1.4x was still a significant discount to the large cap software average at two times.

They added: “While the bears fear pressure on the multiple as EPS growth slows, we'd argue the current multiple does not reflect forward EPS growth.”

Microsoft said it had returned $10 billion (£7.2 billion) to shareholders in the form of buybacks and dividends in the third quarter, an increase of 1% on a year earlier.