Microsoft Corporation (MSFT): Don’t Sound the Alarm Just Yet

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Giving credit where it’s due, software giant Microsoft Corporation (MSFT) is indeed handling the world’s migration from desktop and laptops to tablets and smartphones, and all the technology shifts that go with it.

Microsoft Corporation (MSFT): Don't Sound the Alarm Just YetBut if the 4% selloff MSFT shares dished out during after-hours trading on Thursday is any indication, the company is not doing it fast enough.

The pullback was prompted by the company’s post-close earnings release for its fiscal third quarter. Not only did MSFT fall short of earnings and barely meet revenue estimates, the year-over-year comparisons were also less than thrilling.

Current and prospective owners of Microsoft stock have a tough commitment decision to make.

MSFT Earnings

Last quarter, Microsoft earned 62 cents per share on $22.08 billion worth of revenue. Analysts had been calling for a profit of 64 cents per share and a top line of $22.09 billion.

On a year-over-year basis, non-GAAP revenue was up 1.5%, though on a GAAP basis revenue fell more than 5%; deferred revenue of $1.5 billion added to the tally in the third quarter accounts for most of that differential.

It wasn’t quite as bad as the raw numbers suggest. Had it not been for an adverse currency exchange rate, non-GAAP sales would have been up 5%. Earnings were also sapped by a surprise tax rate of 24% rather than the anticipated 19% to 20%, as the different tax rates in its various geographic markets also proved disadvantageous.

There was no particular bright spot either. Its Azure cloud service revenue was up 120% from year-ago levels, though the “Intelligent Cloud” umbrella that Azure falls under only saw a 3% improvement in sales. Server products and related cloud service sales were up a modest 5%. Microsoft’s “Productivity and Business Processes” — which includes Office 365 — only saw 1% growth despite the 63% improvement in Office 365 revenue. Similarly, “More Personal Computing” only saw 1% growth despite a 61% increase in Surface sales.

Looking Ahead

Whether the glass is half-empty or half-full for MSFT stock is a matter of perspective.

Moor Insights & Strategy analyst Patrick Moorhead sees the glass as half full, “While investors wanted more, Microsoft had an impressive quarter and repeated what they did in prior quarters related to the combination of cloud, Azure and Windows.”

Becker Capital Management’s Sid Parakh is at the other end of the spectrum, responding to Microsoft’s numbers, “There’s still a long ways to go in terms of the multiple-year transition in the company from a Windows and on-premise software company to a cloud, mobile and service-oriented company.”

The opposing points of view are a microcosm of the uncertainty regarding the company’s future.

MSFT didn’t offer any help in that regard either. The company foresees fourth quarter sales rolling between $21.7 billion and $22.4 billion, coming up short of the average analyst expectations of $23.1 billion. Such results would also be lackluster relative to the year-ago tally of $22.18 billion.

Bottom Line for Microsoft Stock

Although the buy-or-sell decision with MSFT right now is torturous, it shouldn’t be — the stock is exactly what it seems to be on the surface, which is a company that’s successfully navigating the evolution away from PCs and towards the cloud. It’s just taking a long time. That’s not apt to change in the near future either.

This doesn’t make Microsoft stock an entirely bad pick though. Indeed, from a value investor’s perspective, there’s something rather compelling about the diversity in Microsoft’s revenue stream and quality of product it brings to the market.

The impasse is that MSFT isn’t presently viewed as a value stock, and isn’t currently priced as a value name.

The forward-looking price to earnings needs to (plausibly) be rolled back to something in the low teens before the risk/reward ratio makes it worthy of a buy again. It could be a rough ride between here and there, and Friday’s 8% selloff demonstrates this difficulty.

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

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Article printed from InvestorPlace Media, https://investorplace.com/2016/04/msft-microsoft-stock-alarm/.

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