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Stock Analyst Update

Microsoft's Forward-Looking Metrics Positive; Raise FVE

While SMB generally remains weak, Azure remains strong, and gaming revenues surged as the global lockdowns continued throughout the quarter. Importantly, commercial bookings and RPO, two forward looking metrics, both grew in excess of revenues for the quarter. 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 the revenue and margin fronts. We raise our fair value estimate to $228 from $196 per share.

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Despite ongoing coronavirus macro concerns, Microsoft (MSFT) once again delivered a strong quarter in terms of both revenue and EPS. While SMB generally remains weak, Azure remains strong, and gaming revenues surged as the global lockdowns continued throughout the quarter. Importantly, commercial bookings and RPO, two forward looking metrics, both grew in excess of revenues for the quarter. 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 the revenue and margin 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. Along with a change to extend the life of data center hardware from three years to four years, which will create a structural margin improvement of more than 100 basis points, we rolled our model for the new fiscal year, and made a variety of minor adjustments. Together these drive our fair value estimate to $228 from $196 per share. Despite the run in the stock, we see more than 10% upside to this high-quality wide moat name.

For the June quarter, revenue grew 12.8% year over year to $38.03 billion, compared with our model and CapIQ consensus both at $36.54 billion. Relative to our expectations, productivity & business processes was slightly light, driven by lower transactional volume for Office 365; intelligent cloud was slightly ahead, driven by more general strength; and more personal computing was sharply ahead, driven by Xbox content and services. As a result of the COVID-19-driven lockdown, the company enjoyed record engagement in its gaming segment. Intelligent cloud remains a key long-term growth driver and saw Azure growth of 47% year over year.

 

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

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