Microsoft Corporation (MSFT) Stock Slumps After Merely OK Q3 Earnings

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MSFT stock - Microsoft Corporation (MSFT) Stock Slumps After Merely OK Q3 Earnings

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The market clearly felt confident that Microsoft Corporation (NASDAQ:MSFT) was going to (proverbially) deliver the goods in its fiscal Q3 report. MSFT stock rallied more than 35% over the course of the past 12 months, and held on to those gains heading into Thursday evening’s announcement.

All told, analysts were expecting the company to turn $23.44 billion worth of revenue into a profit of 69 cents per share. Both projections were up from the profit of 62 cents per share and $22.08 billion worth of sales posted in the comparable quarter from a year earlier.

Those traders weren’t entirely wrong to expect good results. Microsoft ended up earning 73 cents per share, topping estimates. Revenue of $23.56 billion came up shy of estimates, though, sending MSFT stock down 2.0% in after-hours trading Thursday afternoon.

CEO Satya Nadella commented on the third quarter numbers: “Our results this quarter reflect the trust customers are placing in the Microsoft Cloud. From large multi-nationals to small and medium businesses to non-profits all over the world, organizations are using Microsoft’s cloud platforms to power their digital transformation.”

Despite traders’ knee-jerk response to the report, Nadella was right about the number of customers Microsoft is garnering with its cloud products.

Microsoft Earnings in Focus

The past couple of years haven’t been bad ones for the iconic organization. But, they’ve not been great ones either. Sales continued to grow in 2015, but income slumped on a year-over-year basis. Profits turned for the better last year, though revenue was off.

The inconsistency of the company’s results largely marked a transition for Microsoft, away from installed software and hardware-centric services to cloud-based products… largely in response to rivaling services from the likes of Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOGL). Amazon is the current market leader in the cloud computing market, though Google’s offering has a respectable following.

The paradigm shift prompted a complete redivisioning of the company, to better reflect how Nadella intends for Microsoft to do business going forward. The three primary arms are now Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. Those units reflect, respectively, the company’s Office software suite, servers and the Azure interface/platform, and Windows/Xbox.

All three divisions saw much-needed growth in the second fiscal quarter of 2017, ending in December. But, it wasn’t clear if the company could give MSFT stock holders another step forward.

That question was well answered today.

Microsoft’s Productivity and Business Processes unit — the division that’s responsible for integrating LinkedIn with the company’s office-productive products — drove a 22% year-over-year increase in revenue, reaching $7.96 billion. LinkedIn contributed $975 million of that figure.

Intelligent Cloud revenue of $6.76 billion was up 11%, led by the 93% increase in Azure’s business.

The only division to lose ground was the More Personal Computing unit, which saw revenue contract 7% to $8.84 billion. That figure must be taken with a grain of salt, though. In that the Windows 10 upgrade was free for consumers using other versions of Windows and computer companies were and still working through their necessary hardware tweaks for the operating system, a year-over-year comparison doesn’t mean much.

Moreover, Microsoft’s abdication of the smarphone market chopped $730 million off this division’s top line for the quarter.

Regardless, the More Personal Computing arm may be on the verge of heating up again. Earlier this month Microsoft announced it was putting the finishing touches on its CloudBook that will compete with Google’s small-form-factor Chromebooks. This is a sliver of the PC market Google’s Chromebooks have been doing well in … perhaps a little too well for Microsoft’s comfort. The CloudBook will not only be price-competitive, but desirable in that they will utilize the familiar Windows 10 operating system.

That opens the door to further (and easier) integration with other Microsoft platforms and apps.

Looking Ahead for MSFT Stock

Prior to Thursday’s report, analysts had projected a profit of 68 cents per share on $24.52 billion in revenue for the quarter currently underway. That bottom line is a penny less than the prior year’s fiscal Q3 earnings, though the top line outlook is 8.3% better year-over-year.

For the full year, those same analysts are modeling earnings of $2.98 per share of MSFT stock on sales of $96.61 billion, both of which are stronger than last year’s comparable figures.

The company will deliver guidance during the Q3 earnings conference call, scheduled for 5:30 p.m. EST Thursday.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/04/microsoft-corporation-msft-stock-slumps-after-so-so-q3-earnings/.

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