Microsoft firing on all cylinders

The wide-moat firm remains a safe harbor in a sea of rich software valuations

Dan Romanoff, CPA 22 July, 2019 | 1:28AM
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Microsoft (MSFT) reported results that were ahead of consensus expectations, with meaningful upside to revenue, operating margin, and normalized EPS. All three segments contributed approximately equally to revenue strength. Similar to last quarter, management struck a confident tone on the call while offering guidance that was essentially in line. Overall, results continue to reinforce our thesis, centering on customer adoption of hybrid cloud environments with Azure. Microsoft continues to use its dominant position of on-premises architecture to allow customers to move to the cloud easily and at their own pace, which we believe will continue. Adoption of cloud services in the form of SaaS, PaaS, and IaaS remains robust for Microsoft, and the company has passed inflection points where cloud revenue is strong and margins continue to improve. 

We are raising our fair value estimate to US$155 per share, from US$143, after rolling our DCF model and making a variety of minor adjustments. We believe wide-moat Microsoft is firing on all cylinders and remains a safe harbor in a sea of rich software valuations.

For the June quarter, revenue grew 12% year over year to US$33.7 billion, while normalized EPS was US$1.37 compared with US$1.13 a year ago. Intelligent cloud was once again the highlight, with Azure growing 64% year over year (68% in constant currency), which was in line with our expectations. On-premises server units remain strong as well, bolstered by strong demand ahead of end of life support for a couple products. Management called out bigger deals as contributing meaningfully to revenue strength here. Earlier this week, the company signed its largest Azure deal ever, for $2 billion, and CEO Satya Nadella said that Microsoft “had a line of sight to many more such deals.” We estimate Azure generated US$13.1 billion in revenue in fiscal 2019, and we are looking for approximately US$21 billion in fiscal 2020.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Microsoft Corp437.03 USD-1.46Rating

About Author

Dan Romanoff, CPA  Dan Romanoff, CPA, is an equity research analyst on the technology, media, and telecommunications team for Morningstar.

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