Microsoft Corporation’s [MSFT] share price jumped as much as 5% after reporting greater than expected revenue of $30.6bn and a consensus-smashing EPS differential of $1.14 in its fiscal Q3 earnings on 24 April.
The stock’s surge, which briefly saw it trading as high as $131.37, pushed the company past $1tn in market value, making it the third US company to pass the milestone. The share price currently trades around the $129 mark and is up 28% year-to-date.Microsoft 1-year share price performance, CMC Markets, 30 April 2019
Microsoft has maintained a run of strong earnings in the last few quarters, which has seen seven EPS expectation beats in the last 24 months.
Previous quarter’s performance
In January, the company reported revenue that fell slightly short of analysts’ estimates, which at the time sent the stock down 4%. Analysts remained bullish on the company’s prospects, however, with UBS analyst Jennifer Swanson Lowe naming Microsoft as one of her top software picks – predicting they’ll outpace the software’s industry average of 10% revenue growth this year.
Analyst consensus estimates for the quarter’s revenue had been $29.84bn, up about 11.3% from the same quarter last year, according to Refinitiv.
During the most recent earnings call, Microsoft said that it expected revenue to come in between $32.2bn and $32.9bn for fiscal Q4, which would represent only 5.2% to 7.5% in growth from the previous quarter. Analysts had expected $32.6bn, according to Refinitiv.
Cloud business spurs growth
Microsoft recorded year-on-year revenue growth in Q3 of 14%, with the highest amount of growth coming from the commercial cloud segment of its portfolio, which includes Azure.
|PE ratio (TTM)||28.87|
|Return on equity (TTM)||40.12%|
Microsoft stock vitals, Yahoo finance, 30 April 2019
Improvements to its Azure service meant the company’s commercial cloud computing segment enjoyed a 5% jump in its gross margin, year-over-year. This business segment has become integral to the company’s growth, with Microsoft Azure providing stiff competition for Amazon’s [AMZN] market leading cloud platform, Amazon Web Services (AWS). Between them, the companies enjoy 71% market share in the cloud computing space.
Currently, many companies use enterprise data centres over the cloud, with the latter having raised security concerns. But these fears are slowly evaporating, as Microsoft and Amazon invest more in security measures. The result is likely to be that Azure will take an increasingly prominent, and profitable, role in Microsoft earnings announcements, in the quarters to come.
As market analyst Alex Pickrell writes in a Seeking Alpha: “Azure's cloud services are charged based on usage, allowing recurring payments that scale based on usage. This provides Microsoft with consistent and growing earnings which will continue to increase as the shift from enterprise data centers to the cloud remains in its early stage. While Microsoft's total intelligent cloud segment grew 27% YoY, Azure grew 73%, and there's plenty of room left to run.”
Microsoft has also shown a true commitment to expanding its cloud computing offering in China. Its cloud service Dynamics 365 will be available in the country from 6 May through its partner 21 Vianet Group, to aid companies in their efforts to digitise.
Alain Crozier, CEO of Microsoft Greater China, said that after five years of running cloud services in China, the company will step up its offering in the region to deliver long-term, sustainable growth. “China is one of the most dynamic markets, where enterprises are aggressively pushing forward digital transformation, creating abundant growth opportunities,” Crozier said.
“China is one of the most dynamic markets, where enterprises are aggressively pushing forward digital transformation, creating abundant growth opportunities” - Alain Crozier, CEO of Microsoft Greater China
Microsoft has served more than 120,000 enterprise clients with its Azure services in China, and last year it announced a plan to triple its cloud capacity by adding two more cloud regions in the China market. Over 1.8 million users from its 30,000 enterprises clients have adopted the company's Office 365 services. Four of China's top five smartphone makers are also embracing Microsoft's cloud solutions.
AI development key to creating competitive edge
The rise in artificial intelligence (AI) is also aiding Microsoft’s cloud wing, as – according to market research company International Data Corp – 78% of Chinese business leaders say AI will be crucial for their company’s ability to remain competitive. However, only 7% of organisations in the country have incorporated it into their core business strategy. The same report claims AI will more than double the rate of innovation and employee productivity in China by 2021.
Microsoft is currently trading with a forward P/E of 25.99, which Pickrell notes isn’t terribly high considering the tech company’s previous ratios. “Microsoft's current dividend yield is around 1.4%, with a 10-year CAGR of 14.24%. This is likely to continue into the future given MSFT's strong, recurring profits and low payout ratio,” Pickrell said.
Microsoft's forward P/E ratio
Microsoft is expected to report its next quarterly results in July where a clearer picture of the benefits of the Chinese venture, among other things, will crystallise for investors.
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