ii view: a strong quarter for Microsoft, but not stellar

Shareholder returns of nearly $9 billion suggest the technology behemoth is still in rude health. 

Fourth-quarter results to 30 June 2020

• Revenue up 13% to $38 billion
• Net income down 15% to $11.2 billion
• Earnings Per Share (EPS) down 15% to $1.46
• Returned $8.9 billion to shareholders in the form of share repurchases and dividends, up 16%

Chief executive Satya Nadella said:

“The last five months have made it clear that tech intensity is the key to business resilience. Organisations that build their own digital capability will recover faster and emerge from this crisis stronger. We are the only company with an integrated, modern technology stack – powered by cloud and AI and underpinned by security and compliance –  to help every organisation transform and reimagine how they meet customer needs.”

ii round-up:

Windows software maker and cloud data centre operator Microsoft (NASDAQ:MSFT) reported mixed results for the fourth quarter of its financial year. 

A slowdown in growth for its Azure cloud data business, and a lack of sales guidance for the 2021 year ahead, both disappointed. A $450 million charge for the closure of its physical store outlets also dragged on earnings.

Microsoft shares fell by around 2% in US morning trading following the announcement, having rallied by over 30% year-to-date. Shares for cloud data rivals Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL) are up 67% and 17% in 2020. 

Azure cloud sales grew by 47%, down from growth of 59% in the third quarter. International Business Machines or IBM (NYSE:IBM), another Microsoft rival, this week beat analyst forecasts with strong cloud growth. 

Microsoft’s LinkedIn business was also hit by the weak job market and falls in advertising spend, while smaller and medium sized companies were proving more hesitant in upgrading software packages. 

On the upside, cloud usage and demand rose as consumers continued to work and school from home, while demand for gaming products stayed strong as alternative leisure activities remained more limited under Covid restrictions. 

Both revenue and earnings for the quarter beat analyst expectations, albeit earnings per share fell by 15% to $1.46, hindered by costs to close stores. 

ii view:

Under new chief executive Satya Nadella, Microsoft has regained its former vigour. The mistakes of Windows phone software are now comfortably behind it. The software giant’s move to build on its cloud server business has paid off handsomely, and its commercial cloud surpassed $50 billion in annual sales for the first time this year.

For investors, while the Covid-19 pandemic looks to be overall positive for Microsoft – its shares are up over 50% since late March lows – it has also triggered headwinds, and an absence of full-year 2021 guidance for sales or margins suggests some management caution. 

But fourth-quarter shareholder returns of $8.9 billion were up 16% year-over-year, an increase few companies can currently match. In all, 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: 

• Its Windows operating system holds a dominant market position
• More than 95% of Fortune 500 companies run their business on its cloud

Negatives:

• Political concern regarding the size and power of technologies companies has grown
• Offering no year ahead sales or margin guidance

The average rating of stock market analysts:

Strong buy