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Microsoft Surges on Earnings — But Can the Run Continue?

Not everything is rosy in MSFT's latest quarterly report


Microsoft (NASDAQ:MSFT) always gets kicked around as the unloved stepchild in tech. As everyone touts the evolution of consumer and business technology into a “post-PC” world, you can’t help but wonder how the company will stay on top.

Well don’t start carving the tombstone for MSFT just yet. The tech giant just announced its third-quarter earnings results after the bell Thursday, surprising analysts with some record numbers and sending shares surging almost 6% in Friday trading.

The reasons included a revamped line of legacy software, but also some impressive growth in newer business ventures that show Microsoft is indeed evolving beyond its bread-and-butter Windows operating system.

Here are the details: Microsoft’s quarterly revenues were up 6% compared to the year-ago period’s $17.41 billion, while operating income increased by 12% to $6.37 billion. Gains of between 4% and 14% were reported in most divisions (including the mainstay Windows business).

That is reason enough for optimism in the short term. But in case you think this is just one good quarter, CEO Steve Ballmer gave investors reason to be optimistic about the months and years ahead, too.

Microsoft is bringing a series of highly anticipated new products to market this year, including Windows 8 for PCs and tablets. The move is meant to integrate mobile and desktop experiences, something that could connect big with many folks. More importantly, it could help MSFT go “post-PC” without abandoning its dominance in the laptop and desktop markets. There’s also a new version of its flagship Office software suite, with cloud computing features.

So is Microsoft back in the saddle and worth investing in? Maybe. MSFT stock is up about 2% in the last 30 days — not just outperforming the broader Dow Jones, but also tech darling Apple (NASDAQ:AAPL). And StockPickr founder James Altucher has enough confidence in it to make MSFT his pick for InvestorPlace’s 10 Best Stocks for 2012 contest.

But let’s not sound the all-clear just yet. Despite some decent earnings and nice software launches on the calendar, the Entertainment & Devices division of Microsoft continues to struggle. Though the Microsoft Xbox 360 remains the top-selling console in the U.S. for its 15th consecutive month, revenue plummeted 16% as the company failed to follow up on the success of the Kinect motion controller. Also, the Windows Phone remains a huge disappointment — especially when you look at the dismal results hardware partner Nokia (NYSE:NOK) just reported.

It’s also worth noting that net income declined to $5.1 billion from $5.2 billion last year. The EPS total beat expectations, but it’s obviously much better to be growing profits and beating expectations than to see your profits stagnant.

Still, it’s hard to argue against the dominance Microsoft currently enjoys, and it’s encouraging to see it is looking beyond Windows to come up with new revenue streams. Wall Street certainly seems to think some of the pessimism is overblown and has driven shares of MSFT up an impressive 25% year-to-date when you include Friday’s pop — easily three times the Dow Jones’ gains. And now, Microsoft stock is at a new 52-week high.

However, the million-dollar question for investors is whether Microsoft can keep this up and build on its recent successes. The company remains below its 2007 peak even after recent gains in share prices, and will have to do much more than post one good earnings report to stay in Wall Street’s good graces over the next several months.

Jeff Reeves is the editor of, and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace??.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves did not own a position in any of the investments named here.

Article printed from InvestorPlace Media,

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