More Upside for MSFT Stock?
Microsoft Corporation (NASDAQ:MSFT) stock demonstrated that its transformation efforts are working based on its latest quarterly results. It appears that the company is on track for growth and profitability.
Microsoft CEO Satya Nadella refocused the company’s core strategy from devices and services, redefining it as a productivity platform for a “mobile-first, cloud-first-world.” In other words, Nadella explained that the company’s strategy is focused on empowering people to become more productive by delivering a cloud that connects all devices. (Source: “Satya Nadella: Mobile First, Cloud First Press Briefing,” Microsoft Corporation, March 27, 2014.)
MSFT stock has traded between $39.72 and $56.85 per share over the past 52 weeks and has gained almost 20% in stock value over the past year. The company’s market capitalization is $432.39 billion, making it the third-largest publicly traded company following Alphabet Inc (NASDAQ:GOOG) and Apple Inc. (NASDAQ:AAPL).
Microsoft stock delivers impressive financial results, too.
The company reported that its earnings increased 11% to $0.69 per share and its revenue rose two percent to $22.64 billion year-over-year. Wall Street analysts expected Microsoft to deliver earnings of $0.58 per share on $22.15 billion in revenue.
Market analysts commented that Microsoft’s financial performance is impressive, while suggesting the company is implementing the right business strategy moving forward.
In particular, BGC Financial analyst Collin Gillis noted, “This is a nice strong quarter. It is still a company in a pivot with some declining legacy businesses.” (Source: “Microsoft Earnings Are Up, Cushioned by Its Cloud Business,” The New York Times, July 19, 2016.)
Take note that Microsoft’s revenue from its productivity and business processes segment climbed five percent to $7.0 billion, driven by “Office 365,” with consumer subscribers increasing to more than 23.1 million. Office 365 works on smartphones, tablets, and PCs powered by different operating systems.
The company’s intelligent cloud revenue grew seven percent to $6.7 billion, driven by “Azure,” with sales up 102%.
Microsoft’s subscription-based products and services, such as the Office 365, reduce the risk from its more personal computing business, where revenue was down four percent to $8.9 billion during the quarter. The business unit was negatively impacted by a 71% decline in phone revenue.
“This past year was pivotal in both our own transformation and in partnering with our customers who are navigating their own digital transformations. The Microsoft Cloud is seeing significant customer momentum, and we’re well positioned to reach new opportunities in the year ahead,” said Microsoft CEO Satya Nadella. (Source: “Earnings Release FY16 Q4,” Microsoft Corporation, July 19, 2016.)
Microsoft Azure Expected to Grow Over 80%
Microsoft created Azure as an open, flexible, enterprise-grade, cloud computing platform. It is a strong competitor to Amazon.com, Inc.’s (NASDAQ:AMZN) “AWS” cloud computing service.
Trip Chowdhry, managing director of Global Equities Research, noted that Microsoft and Amazon are the only two companies setting the tone for enterprise computing. He estimated that Azure and AWS would grow more than 80% for at least two or three years.
Microsoft is making huge investments, particularly in research and development, as well as marketing to enhance its cloud sales, capacity, and innovation.
During a conference call, Microsoft CFO Amy Hood said the company would focus on improving the profitability of its commercial cloud business. According to Hood, “We expect the commercial cloud gross margin percentage and dollars to materially improve next fiscal year. We have invested heavily to build share, expand geographically and ensure world-class support and reliability for our commercial customers.” (Source: “MSFT Earnings Conference Call Transcript,” Microsoft Corporation, July 19, 2016.)
Microsoft aims to increase its revenue from commercial cloud products to $20.0 billion by 2018, up from $12.1 billion in the recent quarter.
LinkedIn Could Serve as Growth Driver
Last month, Microsoft announced its acquisition of LinkedIn Corp (NYSE:LNKD), the world’s largest professional social network, for $26.2 billion to accelerate its growth, particularly in its Office 365 and “Dynamics” software. (Source: “Microsoft to Acquire LinkedIn,” Microsoft Corporation, June 13, 2016.)
Market observers believe that the acquisition could help Microsoft attract more enterprise customers and strengthen its competitiveness in the CRM and software-as-a-service (SaaS) areas.
The Bottom Line on MSFT Stock
With the acquisition of LinkedIn, I believe that Microsoft is investing and positioning itself for the future. Take note that almost all businesses are connected to social networks to promote their products or services. Advertisers depend on data from social networks to target their customers.
Overall, Microsoft’s growth strategies make sense and could deliver meaningful gains for shareholders in the future.