Microsoft Corporation (MSFT) was not thankful for Friday after its most recent earnings report. After-hours numbers released on Thursday sent shares sinking 7% in one day, and they continued to slide downward after a weekend break.
The damage was especially noticeable because Microsoft posted strong numbers in the quarter before and was rewarded quite handsomely.
In the most recent quarter, Microsoft earned 62 cents per share, which was 2 cents short of expectations, as net profit fell 25% from the year-ago period. One driver was the fact that MSFT reported revenues that increased by a mere 1.5% year over year and also fell short of Wall Street’s consensus.
Sales totaled $22.08 billion instead of $22.09 billion. Management also cited a higher-than-expected tax rate for the earnings shortfall — a non-GAAP rate of 24% instead of just 20%.
Why MSFT Shareholders Ran Away
But investors’ run to the exit wasn’t just due to the hard numbers — it was due to the sales mix.
While the narrative has been about MSFT’s transition to the cloud — a huge drive in Satya Nadella’s appointment as CEO and subsequent game plan — cloud was actually the disappointing segment in the most recent period. The PC division performed better-than-expected, but that’s just a micro example of a dead-cat bounce.
The PC world is still in decline and cloud is still the future. That’s bad news for Microsoft stock short-term, but good news longer-term. The stock’s struggles now do not mean shares are dead money; it just means patience is necessary.
The main takeaway from the most recent results is that the transition to the cloud is just taking longer and moving slower than expected. And as has happened when other companies like Adobe Systems Incorporated (ADBE) have transitioned to the cloud, the new business model means that licensing sales are being depressed and overall revenue is taking a hit.
The company’s COO Kevin Turner nodded to this, saying:
“Digital transformation is the number one priority on our customers’ agenda. Companies from large established businesses to emerging start-ups are turning to our cloud solutions to help them move faster and generate new revenue.”
That was evident in the most recent quarter’s results in the fact that MFST’s commercial cloud annualized revenue run rate passed the $10 billion mark for the first time — an increase from a rate of $9.4 billion in the previous quarter.
As more evidence of cloud progress shows up in subsequent earnings reports — which it will — investors will remember all Microsoft has to offer, such as long-time tech experience and an impressive dedication to shareholders.
Even in the most recent quarter, when MSFT stock was written off as a disappointment, it returned a mouth-watering $6.4 billion to shareholders via share repurchases and dividends. And factoring in the recent sell-off, shares yield almost 3%.
When that guaranteed income is combined with a more on-pace transition to cloud-driven income, investors will get back to applauding shares to new heights.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
