Microsoft 3Q17 EPS Beats Estimates, Cloud Rev. Grow 93%

Microsoft 3Q17 EPS Beats Estimates, Cloud Rev. Grow 93%

The provider of Azure cloud platform, Microsoft Corp (NASDAQ: MSFT), reported lower than anticipated fiscal 2017 third-quarter revenues, last week. The Personal Computing segment revenues declined 8% on y-o-y basis in the recent quarter. These two factors triggered a correction in the stock, which had appreciated by about 3% to $69, in the past one month. Considering the impressive growth in Cloud segment and overall performance, which is discussed in detail below, we anticipate the stock to rally in the days ahead.

The Redmond, Washington-based company reported fiscal 2017 third-quarter revenues of $22.09 billion, up from $20.53 billion in the similar quarter year ago. Including the net impact from Windows 10 revenue deferrals, the third quarter 2017 non-GAAP revenue was $23.56 billion, compared to $22.16 billion in the third-quarter last year.

For 3Q17, the net income increased to $4.80 billion, or $0.61 per share, from $3.76 billion, or $0.47 per share, in 3Q16. Excluding charges, Q3 2017 adjusted non-GAAP income increased to $5.72 billion, or $0.73 per share, from $5.04 billion, or $0.63 per share, in Q3 2016. On average, analysts polled by Thomson Reuters anticipated Microsoft to report earnings of $0.70 per share on revenues of $23.62 billion.

Productivity and Business Processes segment revenue increased 22% y-o-y to $7.96 billion in the third-quarter. Intelligent Cloud revenue was $6.76 billion in 3Q17, compared with $6.10 billion in the last year’s similar period. Analysts at StreetAccount had anticipated revenues of $6.60 billion in Q3 2017. However, the More Personal Computing segment revenue declined 8% y-o-y to $8.836 billion and also missed StreetAccount estimates of $9.22 billion.

Azure, the cloud platform which competes with Amazon, reported a growth of 93% on y-o-y basis, according to Microsoft. Likewise, Office 365 commercial and Dynamics 365 reported a growth of 45% and 81% on y-o-y basis. LinkedIn, which was acquired for $26 billion last year, contributed $975 million to Microsoft’s revenue.

For the fourth-quarter, Microsoft anticipates Intelligent Cloud revenue to be in the range of $7.2 billion to $7.4 billion. More personal computing revenue is expected to be between $8.4 billion and $8.7 billion. StreetAccount analysts anticipate Intelligent Cloud revenue of $7.22 billion and More Personal Computing revenue of $8.92 billion for the current quarter.

Michael Nemeroff, analyst at Credit Suisse stated that Microsoft’s Azure platform would likely grow at 60% per annum until 2018 and by over 30% rate through 2019. Nemeroff also expects an increase in the profit margin to 60% by 2019. So, considering the growth prospects, Nemeroff has issued a target price of $80 for Microsoft. Thus, fundamentally, the stock is expected to remain in a firm uptrend.

Technically, support for the stock exists at 68.10. The stock is also moving along the ascending channel. A further increase in the share price is also indicated by the rising accumulation/distribution line. So, the stock can be expected to appreciate in the near future.

Microsoft - Technical Analysis - 9th May 2017

A call option can be bought with an aim to gain from the impending uptrend. Surplus amount can be invested in the contract when the stock trades near $68 in the NASDAQ. Choosing a date around May 17th for contract expiry would prove beneficial.

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