Software and cloud-services giant Microsoft Corporation (MSFT – Free Microsoft Corporation Stock Report) reported revenue and earnings of $26.8 billion and $0.95 a share for its fiscal third quarter (year ends June 30th). This performance compared quite favorably with our estimates and reflected strong performances from each of the company's three operating segments (Productivity and Business Processes, Intelligent Cloud, and More Personal Computing). Investors seemed content with the release, and appeared happy enough with Microsoft's forecast for the June quarter and its general comments on fiscal 2019. MSFT shares were little changed on the news.
Microsoft continues to make very good progress in the Productivity and Business Processes group, as evidenced by growth in Office commercial products, where the move to cloud-based services and Office 365 is pronounced.
Meanwhile, the combination of server products/cloud services and enterprise services is keeping revenue and operating profit expanding in the Intelligent Cloud segment. To wit, the trend in this segment's revenue and operating profit quickened noticeably in the fiscal third quarter, after already picking up nicely in the second. The rapid adoption of Azure is an important factor here, as are the associated premium services connected with the platform. It is no secret that Amazon Web Services (AWS) is currently the largest player in the cloud infrastructure/platform arena, but Microsoft's strength now puts it in a very solid number two position, suggesting that there may well be further relative improvement with respect to AWS. Although it is still relatively early in the long secular move to cloud computing, we like Microsoft's prospects here.
Finally, although the traditional Windows operating systems is somewhat less prominent in investors' minds, Microsoft continues to have good success in the OEM arena with Windows 10, reflecting the strengthening of the commercial PC market. Elsewhere in the More Personal Computing segment, the company had a good holiday season in Gaming, with revenue advancing 18%.
What about Microsoft stock? The ride has been a little bumpy so far this year, but these high-quality shares continue to find favor with investors. The company's prospects in the cloud arena, which should continue resulting in good revenue and earnings growth next fiscal year (and beyond), suggest that the market support is warranted. In addition, a growing dividend payout and an active stock-buyback program are generally seen as being shareholder friendly. At this juncture, though, those subscribers considering making new commitments to MSFT stock will have to pay a premium at its recent valuation, suggesting a degree of care be taken. That said, if these shares are already owned, we would continue to hold on to them.
About The Company:Microsoft Corp. is the largest independent maker of software. It develops and sells products for a wide range of computing devices. The company also sells the Xbox video game console and offers cloud services.
— Charles Clark
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
