Software giant Microsoft Corporation (Nasdaq: MSFT) reported fiscal fourth-quarter earnings after the bell on Thursday, beating on both revenue and earnings. Despite the beats, investors were relatively unimpressed and MSFT stock wavered in after-hours trading.
Microsoft shares have been on a fabulous run recently, so the initial tepid reaction likely has something to do with the path it took to get here. Through Thursday’s close, MSFT had risen 43 percent in the last year and 280 percent in the last five years, beating the S&P 500 by 26 percent and 195 percent, respectively.
On the face of it though, fiscal fourth-quarter Microsoft earnings certainly don’t pose a threat to that rally.
Here’s a look at the highlights from the iconic tech company’s Q4 2018 earnings.
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MSFT earnings by the numbers. For the three-month period ended June 30, 2018, Microsoft reported earnings per share of $1.13; analysts were expecting $1.08 per share.
Revenue came in at $30.09 billion, up 17 percent year-over-year and meaningfully better than the $29.21 billion figure Wall Street was expecting.
Growth levers. Microsoft “is focusing on areas of technology where it is relevant but also where they see future opportunities to be market leaders,” says Haris Anwar, senior analyst at Investing.com.
So not only does Microsoft want to retain its lead in productivity software, namely Microsoft Office and Office 365 — and of course its core Windows operating system — but it has its tentacles in everything from social networking to gaming, artificial intelligence and cloud computing.
Azure, Microsoft’s cloud computing arm, is still growing rapidly, with revenue up a meteoric 89 percent in Q4. That’s only a modest deceleration from the 93 percent growth it saw last quarter, which is encouraging.
Microsoft doesn’t yet break out Azure revenue in dollar amounts, but is following the lead of Amazon.com ( AMZN), which has seen shares soar to all-time-highs in recent years due largely to the boisterous growth of Amazon Web Services.
“The cloud computing market alone is expected to grow from $285 billion last year to $411 billion by 2020. According to Microsoft executives, that segment is big enough to drive the company’s revenue growth for the next three to four years,” Anwar says.
LinkedIn, a previous MSFT acquisition, continues to grow at a robust clip as well, with revenue up 37 percent.
Gaming revenue, driven by Xbox software and services, grew by 39 percent, more than doubling last quarter’s 18 percent growth rate.
Microsoft’s tablet division also saw big gains, with sales in its Surface segment up 25 percent year-over-year.
Valuation. If there is one word to explain why MSFT shares didn’t explode higher Thursday afternoon, this is it.
Microsoft is simply doing what it’s promised to do. Since taking the reins from Steve Ballmer in 2014, CEO Satya Nadella famously repurposed MSFT into a cloud-centered enterprise.
That shift has been enormously successful, stimulating revenue growth, margin growth and a willingness of investors to pay higher multiples for Microsoft’s earnings. “This surge in profitability is the main reason why MSFT stock doubled in the last two years,” says K C Ma, professor of finance at Stetson University.
Going into Thursday’s earnings announcement, MSFT stock traded at 70 times trailing earnings.
Another reason for that high valuation is Microsoft’s open embrace of the sexier parts of its business.
“The company continues to expand its cloud services, including artificial intelligence, machine learning, and the Internet of Things,” says Kevin Walkush, portfolio manager for Jensen Investment Management.
“Such robust capabilities are attracting larger companies such as Walmart ( WMT), which recently selected Microsoft over Amazon Web Services for its enterprise cloud capabilities,” Walkush says.
[See: 7 of the Best Stocks to Buy for 2018.]
Judging by the Wall Street reaction to Q4 earnings, the market is still roughly OK with paying those lofty multiples.
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Microsoft Corporation (MSFT) Stock: Great Q4, but Little Applause originally appeared on usnews.com
