Microsoft Corporation (MSFT) Stock Is Running Full Speed Ahead

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Microsoft Corporation (NASDAQ:MSFT) is one hot company. The company reported a third quarter that pretty much met expectations. Revenue soared to $23.6 billion, up 7% in constant currency. Not only are the core units delivering, but Microsoft’s attention in AI, natural user interface technology and cloud services keeps the company ahead of its competition.

MSFT stock: Microsoft Corporation (MSFT) Stock Running Full Speed Ahead

Commercial seats grew 35% year-over-year for Office 365. The ASP (average selling price) of Office 365 E3 is growing, thanks to the rapid user adoption. Revenue from Commercial Cloud is now over $15.2 billion annualized. Revenue from Dynamics 365 grew 82%. On its conference call, the company said it will release Azure Stack and SQL Server. SQL Server 2017 will come this fall. It will be the very first database that has the AI built in. More importantly, the database is agnostic to the operating system. It will run on Windows and Linux.

The company touted the integration of Dynamics 365 in Office 365 for meeting business needs. Its competition in this arena is Salesforce.com, Inc. (NYSE:CRM), and winning over CRM’s business will prove difficult because it is trying to beat the No. 1 provider.

Microsoft reported user growth from its massive acquisition of LinkedIn. Investments in LinkedIn Feed help grow desktop and mobile engagement by 20%. The site surpassed a new milestone, with 500 million members on Apr. 24.

Xbox Refresh

Once a drag on Microsoft’s results, user activity is growing on the Xbox One and Xbox Live community. Active users grew 13% to 52 million in the quarter.

The company is on schedule with refreshing the Xbox. In Project Scorpio, the console will support 4K gaming. On the PC front, MSFT’s Surface unfortunately fell short of the company’s expectations. Higher competition and the Surface getting close to the end of its product lifecycle both hurt sales.

In the VR space, the number of apps for the Hololens grew to 150. Sales for the VR unit depend on commercial markets adopting the product.

Microsoft’s weakest hardware unit was the devices unit. Revenue fell 51 percent, hurt by Surface sales falling 26 percent. The company did not have much revenue coming from phones.

Future growth for Microsoft

Microsoft’s Azure is the key for the company’s future growth. During the quarter, gross margins turned positive. As the premium mix of revenue increases and the costs fall, profitability will keep going up.

As computing processing moves to the cloud to support — for example, for the Internet of Things — demand for Azure services will grow. CEO Satya Nadella pointed to the generational opportunities of Intelligent Cloud and augmented reality as trends he does not want the company missing out on.

Although revenue from these markets is small, Microsoft still must invest in these areas. It already dedicated some sales staff in this area. For now, the operating expenses here are very small but will pick up as demand grows.

Takeaway on MSFT Stock

Microsoft’s valuations are still low. At a forward price-to-earnings ratio of 21 times, a pullback in the stock is unlikely. Ideally, value investors will hope for a dip before buying. But unless the market corrects, the stock’s general direction is up.

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

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get actionable insight to achieve strong investment returns.


Article printed from InvestorPlace Media, https://investorplace.com/2017/05/microsoft-corporation-msft-stock-running/.

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