Wall Street on Microsoft's big quarter: 'A safe haven in an uncertain market'

Microsoft reported its holiday quarter results and the consensus on Wall Street is that it was a good quarter for the company, despite a drastically underperforming smartphone business.

In the past three months, Microsoft made:

  • $1.4 billion (£940 million) from Surface, which grew 29%.
  • $6.7 billion (£4.6 billion) from Office and its other productivity apps.
  • $6.3 billion (£4.3 billion) from its cloud business.
  • $12.7 billion (£8.8 billion) from its computing business which includes Windows.

According to analysts at Barclays, Microsoft is “poised for further out performance” beyond this quarter, driven by its growing cloud business. Azure, the cloud service software, grew around 127% year-over-year, beating Amazon Web Services, which grew 69%.

“Microsoft’s commercial business was solid,” said Barclays, highlighting the increases in bookings and uptake in additional Microsoft services from current customers. “Management noted that 60% of customers with enterprise agreements attached commercial cloud services this quarter, a 15% increase from the prior year,” the note reads.

Pacific Crest described Microsoft as “a safe haven in an uncertain market” which continued to grow despite harsh market continues, typified by decreasing PC sales.

“With the strong cash flows from its legacy Windows and Office franchise, and its explosive growth in its cloud offerings, [Microsoft] offers investors consistent cash flows and exciting growth,” according to the note.

“Microsoft has started to deliver on the changes it announced last year,” said Pacific Crest. “The company is demonstrating a renewed financial discipline, and growth is accelerating in the core businesses.” The note sets a price target of $65 (£45), up from the market close of $52 (£36).

According to Pacific Crest, Microsoft is facing problems going forward:

  • Windows is “losing relevancy,” according to Pacific Crest, and this represents a challenge as the software continues to be Microsoft’s biggest source of revenue.
  • Hardware sales, especially mobile, are still unclear. Smartphones sales, driven by the Lumia, dropped nearly 50%. The Surface was up by 29%, but the picture is still muddied.
  • Margins, especially in the cloud, are being squeezed. Microsoft recently had to lower its prices after Amazon did so.

However, there are bright spots, too:

  • Office’s growth has been massive and Microsoft is now seeing its current customers add more services.
  • The cloud business is good, and Microsoft has strong relationships with big businesses. According to a report from Gartner, Microsoft dominates any business with revenues of over $10 billion (£7 billion) or 100,000 employees.

Goldman Sachs, which previously issued a standalone report detailing Microsoft’s prospects, reiterates the optimism, noting that the company is “all about the cloud.” Goldman sets a price target of $57 (£39).

In after hours trading, Microsoft’s stock jumped to $56 (£39) before settling at $54 (£37), an increase of nearly 4%.

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