Microsoft Analysts On Redmond's Q3 Beat: 'A Core Growth Holding'

Microsoft Corporation MSFT reported strongly quarterly results Wednesday, and the Street is bullish.

The Microsoft Analysts

Morgan Stanley analyst Keith Weiss maintained an Overweight rating and lifted the price target from $180 to $198.

BofA Securities analyst Kash Rangan reiterated a Buy rating and $190 price target.

UBS analyst Jennifer Swanson Lowe maintained a Buy rating and increased the price target from $200 to $207.

Wells Fargo Securities analyst Philip Winslow reiterated an Overweight rating and hiked the price target from $185 to $205.

Microsoft Story Is Not Just Steady, But Improving, Morgan Stanley Says

Microsoft appears to be a winner on three emerging trends in the wake of the COVID-19 pandemic, Weiss said: software solutions proving to be key for enabling agility and connectivity, enterprises still persisting with strategic IT initiatives; and the difficult IT spending environment separating "mission critical winners" from the "nice to have losers."

Microsoft, which entered the fiscal third quarter with significant momentum in the Commercial Cloud businesses, navigated through the pandemic to report revenues 4% ahead of the consensus, the analyst said.

Weiss singled out margin performance as even more impressive, which drove EPS about 14 cents ahead of the consensus to $1.40.

Microsoft's guidance incorporated a significant impact from the deteriorating macro environment, he said.

The company still guided to revenue growth of 8-11% in constant currency, but lower margins and a higher tax rate is likely to result in flat EPS, Weiss said.

"The strength of Q3 shows the Microsoft story to be not just steady, but improving — a dynamic which keeps us fully onboard with our Overweight rating."

Microsoft's Guidance Is Solid, BofA Says

Microsoft's solid March quarter underscores several elements of a durable thesis, Rangan said in a Thursday note.

The commercial cloud revenues were in line with BofA's estimate, but upside came from the transactional business, namely Windows and Server, which accounted for $456 million of the beat, the analyst said.

Rangan pointed to a slowdown in commercial bookings as a sore point. The macroeconomic headwinds engendered by the pandemic are being accounted for in the guidance, and the fourth quarter guidance is still very solid at high-single digit growth, the analyst said.

"We believe MSFT is well positioned given that it is cloud like in growth, legacy like in margins, and GAARP like in valuation."

Microsoft A Core Growth Holding, UBS Says

Strong secular demand for Azure and Office 365, along with late-quarter improvements in the PC supply chain, led to the third-quarter revenue outperformance, Swanson Lowe said in a Thursday note.

Azure grew 59% year-over-year, driving upside in Intelligent Cloud, the analyst said.

Strong seat growth and migrations to premium Office 365 SKUs helped the Productivity business segment, and strong demand for Gaming offset weakness in search advertising, she said.

"We think Microsoft remains well-positioned as a net beneficiary of increasing Cloud adoption in the coming years, and continue to see the stock as a core growth holding."

Microsoft Can Sustainably Deliver EPS Growth, Wells Fargo Says

Microsoft's growth and operational efficiency are still not fully appreciated by consensus estimates, Winslow said in a Thursday note.

Microsoft's diverse offerings remain very robust, the analyst said: Teams had 75 million daily active users, Office 365 had 258 million paid seats and Azure Directory boasted more than 300 million active users.

"As such, we view Microsoft Azure as a key beneficiary of an acceleration in cloud migrations — even in an uncertain economic backdrop," he said.

Wells Fargo sbelieves Microsoft can sustainably deliver mid-to-high teens EPS and FCFPS growth, helped by the following factors, Winslow said:

Further abatement of headwinds from a previously declining PC market and the transition to the cloud.
Recurring subscription revenue from Azure and Office 365 continuing to grow robustly.
Prudent cost control.