We recently laid out three critical things Microsoft (MSFT) needed to do to please investors after its first-quarter report. Apparently, Microsoft was listening, because MSFT stock is trading up 10% in Friday’s pre-market.
MSFT reported adjusted revenue of $21.7 billion in its fiscal first quarter — $670 million higher than analyst expectations. Earnings came in at 67 cents per share of Microsoft stock, which was 8 cents better than analysts had predicted.
Those are both huge beats, and plenty of reason for owners of Microsoft stock to celebrate.
Microsoft stock is now hitting levels it hasn’t seen in more than a decade. Yet while MSFT beat analyst expectations, overall revenue still declined 6.5%. So, for Microsoft to be trading at new decade highs despite revenue falling at a mid-single digit rate, there must have been something that investors liked in the quarter.
Windows 10 Proves Successful
In part, investors are applauding the Windows 10 results and the performance of its Microsoft’s Intelligent Cloud segment.
Microsoft’s More Personal Computing segment, which accounts for nearly 45% of revenue, saw a 6% decline in PCs sold by Microsoft. That number might sound bad, but it was much better than the double-digit declines in PC sales worldwide, which suggests that Windows 10 adoption remains high.
Other indications of strong Windows 10 adoption include a 29% increase in search advertising revenue and a 70% increase in Office 365 revenue. Further, MSFT added 3 million Office 365 users, bringing the total to 18.2 million.
However, it was Microsoft’s performance in the Intelligent Cloud that really sparked shareholder sentiment, and Microsoft stock gains.
MSFT Wins With New Corporate Structure
When Microsoft changed its financial structure, it combined Server products, Azure and Enterprise Mobility (among other things). Conveniently, it changed the business structure a few months after management noted cannibalization by Azure to its Windows Server.
The high-margin nature of both businesses took center stage, as did the 8% overall sales growth to $5.9 billion. Furthermore, its operating income soared 14% to $2.4 billion.
This is easily the fastest-growing, highest-margin business that MSFT owns. Intelligent Cloud accounted for 29% of revenue, but a solid 41% of Microsoft’s operating income. Hence, this is a crucial segment to MSFT’s future, representing a large chunk of profit and producing the most meaningful top-line growth.
With that said, the overall performance of Intelligent Cloud completely overshadowed the fact that Azure revenue more than doubled. While great, it suggests that revenue for Windows Server fell, maybe a lot. That change isn’t necessarily a problem; if anything, it proves that Microsoft’s new corporate structure will likely be great for Microsoft stock.
Is Microsoft Stock a Buy?
All things considered, MSFT’s Windows 10 looks like a success, its cloud business continues to click on all cylinders, and Intelligent Cloud is most certainly a gem. These are all things I told InvestorPlace readers to monitor ahead of earnings — things that were most important in determining how MSFT stock would react to earnings.
So at the end of the day, MSFT performed well in these three areas and its stock surged to new highs as a result. However, that doesn’t change the fact that Microsoft remains a company with no growth — one that creates the majority of its revenue in a dwindling PC market.
Therefore, the easy gains have already been made in this post-earnings jump. It’s a great time for current owners to take profits, but there’s no real reason to jump into Microsoft stock at these levels.
As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.
