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Cloud and Windows 10 Shine for Microsoft

The tech giant posted a better-than-expected start to its fiscal year, but we still see the shares as fully valued.


Solid Windows 10 adoption coupled with continued strong growth in the Intelligent Cloud segment led to better-than-expected results for  Microsoft's (MSFT) fiscal 2016 first quarter. We anticipate increasing our fair value estimate to account for these results and a more optimistic near-term growth rate, but we anticipate the shares will still be sitting roughly in 3-star territory. We would seek a larger margin of safety before investing in the wide-moat name.

Total revenue declined 7% (2% in constant currency) and gross profit declined 3% (up 3%), both ahead of our internal forecast. The Intelligent Cloud segment grew 8% (14%) to $5.9 billion as Azure revenue doubled, and sales of core server products also grew 9% in constant currency. The cloud business was able to realize an 8% (15% in constant currency) increase in gross profit, and management intimated that cloud margins should continue to improve.

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