Microsoft (NASDAQ:MSFT) had a blowout second quarter, exceeding market expectations, and delivering a record fiscal year for the company. Led by chief executive officer, Satya Nadella, Microsoft stock has steadily ascended upward this year, while the FAANG stocks have been far more volatile, especially in the wake of mixed earnings this season.
Microsoft has reinvented itself and emerged as a growth company that is extremely profitable, which separates it from higher growth but net loss generating tech firms. Net income on a GAAP basis increased an astounding 137% over the prior year. You don’t expect a big tech company to be delivering growth numbers like that, but MSFT stock is doing just that.
My Microsoft price target has been $150\, and on the tail of strong earnings, that looks as if it will be easily hit and surpassed.
Q2 earnings highlights
Microsoft more than delivered in quarterly earnings.
Revenue increased 12%. Operating income increased by 20%. Diluted earnings per share GAAP was $1.71, increasing 50%. Everything is on-track.
Every division posted strong growth with the one exception of Gaming. Exceptional strength in Cloud computing more than made up for declines in Xbox and services.
“Q4 commercial cloud revenue increased 39% year-over-year to $11.0 billion, driving our strongest commercial quarter ever,” said Amy Hood, executive vice president and chief financial officer. Azure was the main source driver there, with revenue growth up 64%. AWS really needs to keep an eye on MSFT in the space.
Productivity and Business Processes also did very well, with revenues up 14%. Office products are growing steadily both in commercial and consumer divisions. Office 365 Consumer continues to gain traction with subscribers increasing to 34.8 million.
Say what you will about Windows, but Personal Computing showed single-digit growth in the quarter. Windows OEM revenue was up 9%, and Windows Commercial products and cloud services revenue was up 13%.
Cloud was clearly the star of the show, but other divisions pulled their weight as well.
Trade War Concerns
The market’s main source of volatility this year has been trade-war-related. It’s not something that affects MSFT stock the same way it affects semiconductor companies or mobile hardware makers.
China is a small part of Microsoft’s business; they’re there simply to support the multinational companies that do business there. So while they do have a multi-cloud offering in China and just launched Dynamics 365 in China in April, it’s not a core part of their growth strategy.
Microsoft Stock and JEDI
There’s also the $10 billion Joint Enterprise Defense Infrastructure plan (JEDI) government contract that is still up for grabs. It seems that increasingly, Microsoft has a better chance of securing this huge, multi-year cloud contract, which may be announced as early as next month.
Amazon (NASDAQ:AMZN) remains under scrutiny, especially that of President Trump, who has openly tweeted about unfair coverage from Bezos’ owned media company, The Washington Post. The President has also been critical of Amazon’s tax strategies and “ripping off the U.S. Post Office.”
This is, of course, speculation, but it would be a huge win for Microsoft as the dark horse in this race.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.