ii view: why Microsoft’s share price just soared to new high

The dawn of a second wave of digital transformation? This tech giant believes so. 

Second-quarter results to 31 December 

• Revenue up 17% to $43.1 billion
• Net income up 33% to $15.5 billion
• Earnings Per Share (EPS) up 34% to $2.03
• Returned $10 billion to shareholders, up 18%

Chief executive Satya Nadella said:

“What we have witnessed over the past year is the dawn of a second wave of digital transformation sweeping every company and every industry. Building their own digital capability is the new currency driving every organization’s resilience and growth. Microsoft is powering this shift with the world’s largest and most comprehensive cloud platform.”

ii round-up:

Shares for Windows software maker Microsoft (NASDAQ:MSFT) hit a new high in after-hours US trading as the tech giant posted forecast-beating earnings, buoyed by stay-at-home work and play during the pandemic. 

Sales of server products and cloud services jumped 26% as corporations continued to enhance facilities which allow staff and customers to work and shop from home. Sales for Xbox gaming content and services spiked by 40%, aided by the launch of two new consoles in November.

Total group revenue of $43.1 billion exceeded Wall Street forecasts of nearer to $40 billion, rising by 17% year-over-year and accelerating from a gain of 12% in the first quarter. 

Microsoft shares rose by more than 5% in after-hours US trading, leaving them up in excess of 40% over the last year. Shares for cloud data rivals Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL) are up 82% and 33% respectively. Shares for fellow desk-top operating software maker Apple (NASDAQ:AAPL) are up by 85%. 

Accompanying Microsoft estimates for the current quarter pointed to a 16% gain in revenues year-over-year to around $41 billion. That's ahead of analyst forecasts of $39 billion. 

Sales for the personal computing division, and including its Xbox products, rose by 14% to $15.1 billion. Revenues relating to its Surface products gained by 3%. 

Competing against Zoom Communications (NASDAQ:ZM), its Teams video software had 115 million users as of November, up from 20 million in November 2019 before the pandemic.

The Washington state headquartered tech giant returned $10 billion to shareholders in the form of share repurchases and dividends during the quarter. That's up nearly a fifth compared to the second quarter of last year. 

ii view:

Over its last financial year to late June, revenues for the tech giant were split almost equally between its core areas of intelligent cloud, personal computing and productivity and business processes at around one third each. Its home US market just outpaced the rest of the world, generating 51% of overall sales. Under new chief executive Satya Nadella, Microsoft has regained its former vigour. Now only Apple has a bigger US stock market value. 

For investors, some areas of underperformance at the company continue to be suffered. Sales of its OEM windows product, where the license cannot be moved to another PC, proved flat, having retreated by 5% in the previous quarter. The debate over valuations for tech sectors also remains ongoing, while a new US government could look to raise corporate taxes as borrowing currently increases under the pandemic. 

But exposure to growth in cloud computing, and still the world’s dominant business software Windows, makes Microsoft a potent force. The group’s growing IT security product presence is also noteworthy. In all, and with analyst estimates likely to be under upward pressure following these latest results, investor support for Microsoft remains deserved. 

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
• Forward price earnings/ratio (PE) comfortably above the 10-year average

The average rating of stock market analysts:

Strong buy