It's Hard To Find Problems With Microsoft's Q4 Earnings: The Street Weighs In

Microsoft Corporation MSFT reported fourth-quarter earnings Thursday. EPS came in at $1.14 versus analysts’ $1.08 consensus estimate. Sales for the quarter also beat the street’s estimate of $29.22 billion by about $900,000.

The Street Weighs In

Microsoft’s earnings were “what a big wow really looks like,” said Brent Bracelin of KeyBanc in a note.

The first aspect of the report analysts picked up on was, of course, sales. Sales were “better across the board,” said Morgan Stanley analyst Keith Weiss.

Analysts were particularly impressed by growth in cloud and internet services, including Azure, Office 365 and LinkedIn among others. Combined, these services rose 42 percent year-over-year and surpassed a $40 billion run rate for the first time.

Bracelin noted that cloud and internet services now contribute 34 percent of Microsoft’s total sales — up from 5 percent in 2015 — would could soon grow to account for 50 percent.

Small Concerns

Credit Suisse’s Brad Zelnick voiced one small concern: Azure growth slowed during the quarter. The analyst qualified this though, adding that it had a tough comparison to match — 85 percent growth versus the previous three quarters’ 89 percent, 98 percent, and 89 percent — and still beat Wall Street’s expectations.

A few analysts also picked up on cash flows, nothing that both CFFO from operations and FCF were below consensus estimates. Stifel analyst Brad Reback called it the “lone nit” in the quarter. Cash flows were negatively impacted by several 1-time payments and an earlier-than-expected holiday-related inventory buildup.

Looking Ahead

Looking forward, Microsoft CFO Amy Hood’s comments on fiscal 2019 were positive albeit with one point of moderation on Commercial Cloud gross margins, which are expected to be higher but with less annual improvement in per-user services.

Management’s bullish outlook has reinforced Weiss' conviction that the company is well on its way to a $1 trillion market cap.

It should be noted that there is one notable Microsoft bear out there.  John DiFucci of Jefferies doubts whether Azure can catch up to Amazon.com, Inc. AMZN’s AWS platform.

“We continue to question the sustainability of this outperformance relative to PC shipments simply because it is unprecedented,” DiFucci said in a note.  “[We] do not understand why it is happening.”

The Ratings

• Jefferies analyst John DiFucci reiterated an Underperform rating and $75 price target.
• Morgan Stanley’s Keith Weiss reiterated an Overweight rating and $130 price target.
• Stifel analyst Brad Reback maintained a Buy rating and upped his price target from $107 to $118.
• KeyBanc analyst Brent Bracelin reiterated an Overweight rating and raised his price target form $110 to $123.
• Credit Suisse’s Brad Zelnick maintained an Outperform rating and raised his price target from $115 to $125.

Price Action

Microsoft shares opened 3.5 percent higher on Friday and traded around $106.90 at time of publication.

Related Links:

Stifel Raises Microsoft Price Target After 'Big Wow' Of A Quarter

How Microsoft Could Build The 'Netflix Of Gaming'