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.
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Microsoft Corp.  (MSFT) - Get 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.

"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."