Microsoft Corporation: What to Do With This Earnings Gift (MSFT)

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Microsoft Corporation (MSFT) CEO Satya Nadella is far too soft spoken to ever attract the kind of cult of personality that the late Steve Jobs attracted at Apple Inc. (AAPL).

microsoft stock-msftWell, he should. While Nadella hasn’t transformed Microsoft quite to the degree that Jobs transformed Apple (at least not yet), he’s still managed to do the unthinkable:

Take a tired, old tech company and make it new again.

MSFT announced fiscal second-quarter earnings Thursday after the close, and Microsoft stock is up big after hours. As I wrote Thursday morning, Wall Street was expecting to see earnings of 71 cents per share of Microsoft stock on revenues of $25.2 billion. Instead, they got adjusted EPS of 78 cents per share on revenue of $25.3 billion.

So, Microsoft delivered a rare gift these days: A beat on both the top and bottom lines. This earnings season has been mostly one of disappointment, as company after company has cited a strong dollar and tepid global growth as major headwinds. It’s nice to see MSFT bucking that trend.

Microsoft stock holders also enjoyed $6.5 billion in dividends and share repurchases over the quarter. Not too shabby.

Let’s dig into some of the details, as well as the investing takeaway.

Microsoft Earnings

Interestingly, it’s worth noting that MSFT’s revenues were actually down 10.1% for the quarter, due to PC sales weakness, currency headwinds and Microsoft’s continued transition to a subscription model, which I highlighted in the earnings preview. Yet investors were willing to look past all of this because the numbers they actually care about — in the cloud division — were moving the right direction.

Revenues in the Intelligent Cloud division rose 11% after adjusting for currency moves, and revenue for Azure, MSFT’s enterprise cloud solution, saw its revenues grow 140%. Azure still trails Amazon.com, Inc. (AMZN) AWS in market share — 10% vs. 30%, respectively — but MSFT clearly has the momentum here.

I’ve been a fan of MSFT’s Surface tablet for quite some time now and rarely leave the office without mine. Well, it appears I’m not alone. Surface revenue was up a good 29% for the quarter after adjusting for currency moves.

Is there anything not to like?

Well, despite the relative success of Windows 10 — it’s now active on more than 200 million devices — Microsoft’s traditional PC business is looking wobbly. Windows OEM revenue was down 5% for the quarter. Of course, Microsoft made the decision to give Windows 10 away for free, so the lack of revenue growth here shouldn’t be too surprising.

And then there’s the Windows Phone. Believe it or not, I actually used to own one of those. (Yes, I was that guy.) I loved the platform, and it definitely had its fans around the world. But MSFT essentially decided to punt on the platform over the summer. They didn’t exactly kill it; MSFT is still making Windows Phones, if for no other reason than to prove their point about Windows 10 working across all devices. But Nadella definitely de-emphasized the business going forward. So, it’s not surprising that sales in that segment fell 49%.

So, where does Microsoft stock go from here?

I believe in the long-term Microsoft story. But after the run Microsoft stock has had, it’s not quite the screaming bargain it used to be. From this point on, I expect MSFT shares to perform more or less in line with the market.

You don’t need to run out and dump the shares you own. But I would probably wait for a good pullback before adding new money.

Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas. As of this writing, he was long AAPL and MSFT.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/01/microsoft-stock-q2-msft-earnings/.

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