Microsoft In The Clouds With Q1 Earnings Report On Continued Strong Azure Performance

For Microsoft Corporation MSFT, the future is getting less cloudy every quarter — it’s in the cloud.

With Azure cloud services again boosting the balance sheet, with some help from Windows subscription growth, Microsoft reported a robust first quarter, with earnings and revenue both beating expectations, keeping sell-side analysts bullish on the stock.

The 59% year-over-year Azure-driven cloud growth keep Redmond under CEO Satya Nadella in the top layer of tech companies as more customers move data to the cloud.

The Analysts

BMO’s Keith Bachman raised the target price on the stock from $160 to $165 and keeping an Outperform rating.

Bank of America analyst Kash Rangan reiterated a Buy rating and $162 price target.

Edward Jones analyst Logan Purk reiterated a Buy rating.

UBS analyst Jennifer Swanson Lowe reiterated a Buy rating and $162 price target on the stock.

Wells Fargo’s Philip Winslow reiterated an Outperform rating kept a price target of $160 on the stock.
Wedbush analyst Daniel Ives raised the target price from $160 to $170 and maintained an Outperform rating.

The Theses

Microsoft delivered revenue upside across the board, and continued to have "very high margins" and strong free cash flow, said Bachman. Given broader economic issues, the results "did not highlight a slowdown in tech spending, which should come as some relief across software in the near term."

With server product revenues up 14% and an end of life upgrade for Windows 7, it was a "stellar September quarter with across-the-board strength," added Rangan.

The key cloud products — Azure, Office 365 and Dynamics CRM — represent more than $28 billion in sales, "arguably are the strongest, most comprehensive cloud software offering in all of technology," said Purk.

Safe Haven

Swanson Lowe said Microsoft has provided a safe haven from volatility elsewhere in growth software, and thinks the share price will continue to "grind higher" for several quarters, even years. While Azure got most of the attention, Microsoft's main business segments all saw quarter one beats. For Swanson Lowe, operating income up 27% year-over-year was a standout, along with commercial bookings up 30%.

One small negative note: Swanson Lowe slightly reduced her second-quarter revenue forecast on tough compares in gaming.

The Future

The future is clearly in the cloud and it's sunny for a while for Nadella and company, said Ives.

"We believe the shift to cloud is a major secular trend that is significantly benefiting MSFT in the field as a key tailwind and should continue its momentum throughout FY20," he wrote in a note. "We remain bullish on MSFT into 2020 given our thesis that Azure's cloud momentum is still in its early days."

Winslow also was bullish about the upcoming year, saying Microsoft should sustainably deliver mid-to-high teens EPS and FCF growth, noting headwinds from the declining PC market and transition to the cloud will continue to abate, recurring subscription revenue from Azure and Office 365 should see robust continued growth and cost control remains expected.

Price Action

Microsoft shares were up 1.9% to $139.94.

Photo courtesy of Microsoft.