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Microsoft share price hits record high after earnings beat; any upside left?

Microsoft’s [MSFT] Q4 earnings results on Thursday lit up a reporting season that has been decidedly downbeat. The numbers crushed analyst expectations and sent Microsoft’s share price to a record high, cementing its position as the world’s most valuable company in the process.

This is in contrast to the muted expectations of other companies releasing quarterly results. According to Bloomberg, 80% of S&P 500 companies that gave early estimates ended up cutting back on expectations.

With these kind of market conditions, traders will be on the lookout for defensive plays that will outperform in a bear market.  On the basis of its Q4 results, Microsoft looks to be one such play.

 

 

What has been driving growth?

Microsoft's share price is up over 35% since the start of the year, far outpacing rival Apple's 28% gains and the wider S&P 500’s 18%.

Under CEO Satya Nadella, Microsoft has accomplished a feat few would have thought possible by becoming a leader in the new tech economy. Powering this transition has been cloud services and the ability to win deals against rival Amazon.

35%

Increase of Microsoft's share price since start of 2019

  

Last quarter Microsoft recorded year-on-year revenue growth of 14%, with the highest amount of growth coming from its cloud computing business. Cloud is a huge money maker for Microsoft, with its Azure product commanding a 16% share of the global market.

 

What happened in Q4?

Microsoft smashed most analyst’s expectations in Q4. Adjusted earnings per share came in at $1.37, beating the expected $1.21 per share consensus on Refinitiv. Also beating expectations was $33.72 billion in revenue, topping the predicted $32.77 billion. This was a 12% jump compared to the same time last year, and the ninth straight quarter to see double digit revenue growth.

Commercial revenue from cloud services came in at $11 billion, up 39% compared to the same time last year. The More Personal Computing business segment, which includes Windows, Xbox and Search, brought in $11.28 billion in revenue, beating the expected $10.99 billion.

Microsoft’s Intelligent Cloud business, which includes Azure, delivered $11.39 billion in sales, beating the expected $11.02. Included in these numbers was a 64% jump in revenue for Azure as Microsoft continues to grow its cloud services. Although this was Azure’s slowest growth rate for four years. 

Still, 64% growth is nothing to be sniffed at and, according to Berstein's Mark Moerdler, Azure will generate $140 billion in long-term sales.

$140billion

Azure' s predicted revenue from long-term sales

 

One of the few areas that didn't see growth was Microsoft's gaming business, with reported revenue down 10%. This side of the business is likely flagging as gamers wait for the next generation of the Xbox console - codenamed Project Scarlett - to hit the shelves in time for Christmas 2020.

Guidance for next quarter is for revenues to come in between $31.7 billion and $32.4 billion, which is in line with the $32 billion consensus on Refinitiv.

Microsoft's share price jumped 3% on Friday following the results to hit a new intraday record of $139.63. This saw the company’s market cap reach a staggering $1.04 trillion.

 

Market cap$1.05tn
PE ratio (TTM)27.00
EPS (TTM)5.06
Quarterly Revenue Growth (YoY)12.10%

Microsoft share price vitals, Yahoo Finance, 22 July 2019

 

Is Microsoft stock a buy?

Overall, it's been a bumper 2019 fiscal year for Microsoft. Revenue came in at $125.8 billion, a 14% increase on the previous year. While diluted earnings per share was $5.06 GAAP, a huge 138% increase.  

Among analysts the consensus rating is a “Strong Buy” and the average price target points to around 8% upside. On Friday, NASDAQ has the stock’s support level at $132.61, 4% below the current share price while resistance was at $138.63.  

The question is after another set of stellar results and a soaring share price, can the company keep delivering the earnings beats.

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