ii view: Microsoft results leave shares little changed

Sales and earnings beat at Microsoft. Cloud revenue up 59% although short of high forecasts.

First-quarter results to 30 September 2019

• Revenue up 14% to $33.1 billion
• Net income up 21% to $10.7 billion
• Earnings Per Share (EPS) up 21% to $1.38
• Returned $7.9 billion to shareholders in the form of dividends and share repurchases

Chief Executive Satya Nadella said:

“The world’s leading companies are choosing our cloud to build their digital capability. We are accelerating our innovation across the entire tech stack to deliver new value for customers and investing in large and growing markets with expansive opportunity.”

ii round-up:

Windows software maker and cloud data centre operator Microsoft Corp (NASDAQ:MSFT) reported sales and earnings which surpassed analyst estimates in these first-quarter results.

Competing against Alphabet Inc A (NASDAQ:GOOGL) and Amazon.com Inc (NASDAQ:AMZN), its Azure cloud computer server business has become a key driver of its fortunes in recent years. Global demand for data storage has soared as the internet has effectively allowed the outsourcing of corporate data storage. 

The Azure cloud business reported an impressive 59% increase in revenues, although this was marginally shy of analyst’s high hopes and down on the 64% improvement generated in the prior quarter. 

Server products and cloud services revenues jumped by 30%, while sales for both its Office 365 Commercial and LinkedIn products rose by 25%. 

Less favourably, Xbox content and services sales proved flat, whilst Surface product revenues declined by 2%. 

Microsoft shares proved little changed in after-hours US stock market trading. 

ii view:

Seemingly having previously lost its way with Windows phone software, Microsoft has now revived its fortunes. The arrival of the current chief executive in 2014 has had a galvanising effect, providing renewed clarity of purpose. Its move to build on its cloud server business has paid off handsomely. 

For investors, Microsoft shares have regained their former growth tag, evidenced by a current forward price/earnings (PE) ratio of just over 25, which is about 8 points above its 10-year average. Shareholder returns, and eight consecutive years of dividend growth should also not be forgotten, although dividend income is not what you buy Microsoft for. This well-run tech company gives investors exposure to parts of the economy and industry catalysts that are difficult to find elsewhere. For many investors it remains a must-own stock.

Positives: 

• More than 95% of Fortune 500 companies run their business on its cloud
• Its Windows operating system holds a dominant market position
• Returned $7.9 billion in Q1 via share repurchases and dividends

Negatives:

• Xbox content and services sales proved flat
• Alphabet Google and Apple are working on their own streaming and subscription services for video games
• Political concern regarding the size and power of technologies companies has grown

The average rating of stock market analysts:

Strong buy