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Stock Analyst Update

Microsoft Shines; Lifting FVE to $325

Quarterly strength along with upside to guidance and the annual roll of our DCF model drive our fair value estimate to $325 from $278 per share. We continue to see upside to this high-quality name from here.

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Wide-moat Microsoft (MSFT) continues to benefit from an ongoing wave of digital transformation, which helped the company once again drive material upside compared with its revenue and EPS outlook for the quarter. Guidance for the first quarter was nicely above FactSet consensus as well. Azure and commercial related demand was robust by any measure, even as supply constraints for PCs and Surface tablets hurt on the consumer side. Importantly, commercial bookings and RPO, two forward-looking metrics, both continue to significantly outpace revenue growth. We remain impressed with Microsoft's ability to drive revenue and margins at this scale and we believe there is more to come on both fronts. Results continue to underscore our thesis, which centers 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 over the next five years. Quarterly strength along with upside to guidance and the annual roll of our DCF model drive our fair value estimate to $325 from $278 per share. We continue to see upside to this high-quality name from here.

For the June quarter, revenue growth accelerated to 21.3% year over year to $46.15 billion, compared with our model at $44.33 billion and FactSet consensus at $44.14 billion. Relative to our expectations, all segments were ahead, with most upside driven by the productivity and business processes, and intelligent cloud segments. All segments were above the high end of guidance. Enterprise software and services showed signs of strength, with acceleration in Azure, which was up 51% year over year; acceleration in dynamics, which was up 33%; and LinkedIn, which accelerated sharply to up 46%. Channel constraints drove Surface revenues down 20% compared to the year-ago period. We remain impressed with on-premises server products still growing despite the cloud headwind.

 

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Dan Romanoff does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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