Microsoft Earnings: All Segments Are Good, With Azure Expected to Remain Strong Throughout 2024

We are raising our fair value estimate; Microsoft stock modestly undervalued.

Dan Romanoff, CPA 25 October, 2023 | 8:38AM
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Microsoft

Key Morningstar Metrics for Microsoft

What We Thought of Microsoft’s Earnings

Wide-moat Microsoft MSFT reported solid first-quarter results, including meaningful upside on both the top and bottom lines. We see modest improvement in the demand environment on the commercial side, with Azure strength, modest artificial intelligence contributions, an easing of cloud optimization efforts by clients, and persistently solid execution. We’re also encouraged by Microsoft’s outlook, especially consistent Azure growth in excess of 25% throughout the year. Guidance includes Activision, which adds more than $6 billion in revenue to our estimates but pressures margins in the near term.

These factors drive us to raise our fair value estimate on Microsoft stock to $370 from $360. We continue to see shares as modestly undervalued, dancing between 3 and 4 stars.

Microsoft Benefiting From Hybrid Cloud

We see results as reinforcing our long-term thesis centering on the proliferation of hybrid cloud environments and Azure, as the firm continues to use its on-premises dominance to allow clients to move to the cloud at their own pace. We center our growth assumptions around Azure, Microsoft 365 E5 migration, and traction with the Power Platform for long-term value creation. We also see a new growth avenue emerging in the form of AI, where Microsoft is positioned as a clear leader.

For the September quarter, revenue grew 13% year over year as reported, or 12% in constant currency, to $56.52 billion, compared with the midpoint of guidance of $54.3 billion. Relative to the year-ago period (as reported), productivity and business processes, or PBP, grew 13%, intelligent cloud, or IC, grew 19%, and more personal computing, or MPC, grew 3%. Compared with guidance, all three segments were ahead of the top end of the ranges, with both IC and MPC meaningfully better. Good sales execution, a hallmark of this management team, helped drive solid renewals once again.

Intelligent cloud results were another bright spot, with Microsoft cloud growing 23% in constant currency to $31.8 billion. Azure remains a focal point, and it did not disappoint, coming in at 28% year-over-year growth in constant currency, which was slightly ahead of guidance.

Workload optimization seems to have ebbed for now, which we think should persist throughout the rest of the year, as clients are now testing new workloads, particularly those involving AI, which we believe could have contributed 200 basis points of growth. Management noted better utilization around GPUs, and Microsoft bought more GPUs than initially planned. Microsoft’s management also noted a good deal of activity for Azure, which we think bodes well for the next couple of years.

Microsoft Stock Price 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Microsoft Corp419.21 USD-2.32Rating

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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