Microsoft Gains from Its Cloud Strategy
Microsoft Corporation (NASDAQ:MSFT) reported strong first-quarter earnings yesterday that beat analyst expectations. MSFT stock closed at $57.25 in the last trading session, and it is inching closer to its all-time high of $59.97, recorded on December 1999.
Microsoft has reported adjusted first-quarter earnings per share of $0.76 on revenue of $22.33 billion, which is ahead of the consensus estimates. The intelligent cloud segment stole the limelight, as it brought in $6.38 billion in revenue, which was much better than what analysts were expecting. The company said that the sales for its “intelligent cloud” business will be between $6.55 billion and $6.75 billion in the current quarter.
The sales of its flagship cloud product “Azure,” which businesses use to host sites or apps, went up by 116%. Microsoft CEO Satya Nadella said that the core enterprises are becoming digital companies, and that Microsoft is well positioned to serve them. “We are helping to lead a profound digital transformation for customers, infusing intelligence across all our platforms and experiences,” said Nadella. (Source: “Earnings Release FY17 Q1,” Microsoft Corporation, last accessed October 20, 2016.)
However, the success of Microsoft’s cloud business overshadows the muted performance in its other segments. Revenue in Microsoft’s “More Personal Computing” segment declined two percent to $9.3 billion, with phone revenue declining by 72% and gaming revenue declining by five percent.
But Microsoft is positioning itself well in the changing technology landscape. The software giant acquired LinkedIn Corp (NYSE:LNKD) recently, and it is expected to complete the acquisition in the second quarter of fiscal 2017. The acquisition will add value to Microsoft’s “Productivity and Business Processes” segment. If it goes as planned, the deal will provide a further boost to MSFT stock.
The company has instilled greater confidence in investors as it moved away from its “Windows” operating system and its “Office” software to focus on mobile and cloud computing. Analysts have revised their targets upwards after the spectacular results. Raymond James Financial, Inc. (NYSE:RJF) has raised its Microsoft stock price target from $65.00 to $69.00, whereas JPMorgan Chase & Co. (NYSE:JPM) has raised its target from $55.00 to $57.00. CLSA has revised its target from $60.00 to $65.00.
Pacific Crest Securities said that the results are great, as the cloud gross margin is 49%, as compared to 42% last quarter. The firm is bullish on MSFT stock, as Microsoft stands to gain significantly from the shift to cloud and digital. (Source: “Microsoft earnings: 76 cents a share, vs expected EPS of 68 cents,” CNBC, October 20, 2016.)
All eyes are now on the Microsoft event on October 26, where the company is expected to launch a new “Surface” all-in-one personal computer (PC). Microsoft might have a winner in its hands and, if the new product is received well, MSFT stock is likely to hit another high.
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