Ahead of the fiscal fourth-quarter earnings report for Microsoft (NASDAQ:MSFT), Wall Street was certainly upbeat. And yes, it looks like much of the good news was baked into Microsoft stock. On the heels of Microsoft’s earnings report, MSFT shares are up about 1%.
Now the company did pull off a beat — both on the top and bottom lines. Revenues jumped by 17% to $30.09 billion, versus the Street expectations of $29.21 billion. As for Microsoft earnings per share, they came to $1.13, compared to the consensus of $1.08. Keep in mind that management has a long history of being conservative on its own forecasts.
Microsoft also was busy during the quarter striking up important deals. Here’s a look at some of the standouts:
- Microsoft Dynamics 365: This is the CRM cloud platform and it has been getting traction lately (during the quarter, revenues were up by 61%). Microsoft teamed up with Adobe (NASDAQ:ADBE) — with its Experience Cloud system — for a rollout with 24 Hour Fitness, which has more than 420 clubs across the US. Microsoft also announced a deal with National Oilwell Varco, which will use Dynamics 365 to streamline its field operations.
- Microsoft Office 365: Yes, there was a major upgrade to this franchise. Some of the features include a simplified interface (such as with the ribbon), improved search that is powered by AI (Artificial Intelligence) and a better collaboration.
- IoT (Internet-of-things): Microsoft and GE (NYSE:GE) expanded their partnership for the IoT market. This will involve the extensive capabilities of Azure Data and Azure IoT along with GE’s Predix system, which has customers like BP (NYSE:BP) and Maersk. According to data from GSMA Intelligence, the market opportunity is expected to reach $1.1 trillion by 2025.
- Cloud: Microsoft and Walmart (NYSE:WMT) entered a 5-year strategic relationship to migrate much of Walmart.com and samsclub.com to Azure.
- Mega Acquisition: Microsoft agreed to spend $7.5 billion to acquire GitHub, which is the world’s largest repository of computer code. The platform should be a nice source of potential customers for cloud services.
Microsoft Earnings and the Cloud
No doubt, the main driver for Microsoft earnings is the continued momentum from the cloud. During the quarter, the commercial cloud business posted a 53% increase in revenues to $6.9 million. The Azure platform also showed robust strength, with revenues up 89%.
Now it’s important to keep in mind that this success has not been easy. After all, various other legacy tech companies — like Oracle (NYSE:ORCL) and IBM (NYSE:IBM) — have struggled with their transitions.
Yet Microsoft CEO Satya Nadella had the foresight to make early bets on the cloud. To this end, he retooled platforms like Office and SharePoint. But Nadella has also been savvy with acquisitions, as seen with deals for companies like LinkedIn.
As a result, the strategy has placed Microsoft at the No.2 slot in the cloud market, just behind Amazon.com (NASDAQ:AMZN).
Bottom Line on Microsoft Earnings
All in all, Microsoft had a great quarter. It’s actually tough to find anything wrong about it.
Instead, when it comes to Microsoft, probably the biggest issue is that the valuation on the stock is not cheap, with the forward price-to-earnings ratio at 26X. The dividend is also only 1.65%.
But for investors with a long-term view on things, the valuation is more reasonable. The cloud opportunity is a megatrend that will last for some time. What’s more, Microsoft is positioning itself for other critical markets like IoT and AI. Oh, and the company continues to crank out substantial amounts of cash flows, which will allow for continued aggressive investments in M&A and R&D.
In other words, it does look like the bull case on Microsoft stock is still intact.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.