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Microsoft Shares Slip Lower Despite Azure-Driven Q1 Earnings Beat

Cloud revenues continue to drive growth for tech giant Microsoft, which has seen a surge in companies shifting their business process online and consumers upping purchases of PCs and video game consoles during the coronavirus pandemic.

Microsoft Corp.  (MSFT) - Get Microsoft Corporation Report shares slipped lower in pre-market trading Wednesday, falling in line with a broader sell-off on Wall Street, even after the tech giant posted stronger-than-expected first quarter earnings thanks to surging growth in its cloud business.

Microsoft said earnings for the three months ending in September, its fiscal first quarter, rose 32% from last year to $1.84 per share, well ahead of Street forecasts, as revenues climbed 12% to $37.2 billion. Microsoft's operating margins improved to 43%, the company said, while its expenses fell 3% thanks in part to "greater than expected COVID-related savings and investments that shifted to future quarters." 

Azure, Microsoft's benchmark cloud offering, saw revenues rise by a forecast-beating 48% from last year while its commercial cloud division saw a topline increase of 31% to $15.2 billion, with gross profit margins expanding by 5 points to 71%. Stay-at-home work dynamics, as well as virtual learning for hundreds of millions of schoolchildren around the world -- as well as video game playing after their lessons have ended -- helped boost PC sales 6% to $11.8 billion, Microsoft said.

CFO Amy Hood said commercial cloud margins will likely improve further over the final months of the year, with total company revenue rising by 1 percentage point from the prior quarterly period.

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"What we have learned over the last nine months or so is the best way for any business to ensure both, resilience as well as pivot and transform and re-imagine how to work with some of the constraints is digital tech," CEO Satya Nadella told investors on a conference call late Tuesday. "So, whether it’s infrastructure, whether it’s data or on (software as a service), it’s, in fact, increased adoption rate. Even the smallest of businesses need to be able to deploy a solution quickly for some workflow that allows them, say, for example, to do curbside pickup if you’re a retailer and a small business."

Microsoft shares were marked 2.5% lower in early trading Wednesday to change hands at $207.87 each, a move that would still leave the stock with a six month gain of 22.4% and a market value of just under $1.6 trillion.

"Though not inexpensive at this juncture, we continue to believe that Microsoft deserves to be a core software holding, supported by Microsoft generating 12% y/y constant currency growth even in the face of a weaker macro backdrop," said BMO Capital Markets analyst Keith Bachman, who carries an outperform rating with a $245 price target for the stock. 

"In our preview, we had suggested that Azure growth would be between 45% y/y CC growth and 48% (our upside case); actual growth was 47% y/y CC, which we view as solid results," he added. "Consolidated revenue guide points to a deceleration, though we think is conservative."