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Microsoft Stock Leaps After Cloud Sales Outlook Supports Q2 Earnings Beat

Microsoft shares reversed course in overnight trading, and helped lift the broader stock market, after it forecast 'significant' revenue gains for its key Azure cloud division in the current quarter.

Updated at 12:35 pm EST

Microsoft  (MSFT) - Get Microsoft Corporation Report shares jumped higher in pre-market trading, reversing significant losses from last night, as investors reacted to solid near-term sales forecasts that offset a mixed batch of second quarter earnings for the world's second-largest tech giant.

Microsoft told investors on a conference call late Tuesday that current quarter revenues for Azure, its benchmark cloud offering, would rise "significantly" from last year's levels, thanks in part to new enterprise contracts, Microsoft 365 momentum and the hybrid cloud management service called Arc. 

The better-than-expected outlook offset concerns linked to slowing Azure growth rates -- albeit the unit still paced a 26% increase in Intelligent Cloud division revenues -- that marred an otherwise solid set of second quarter earnings figures, including record revenues of $51.7 billion and a Street-beating bottom line of $2.48 per share.

"Our Azure Arc customer base has tripled year over year. We're now helping thousands of organizations, from BP to Rabobank, unify their on-premises, hybrid, and multi-cloud infrastructure," CEO Satya Nadella told investors on a conference call late Tuesday.

"And as the digital and physical worlds come together, we're seeing real enterprise metaverse usage. From smart factories to smart buildings to smart cities, we are helping organizations use the combination of Azure IoT, Digital Twins, and Mesh to help digitize people, places, and things, in order to visualize, simulate, and analyze any business process," he added. "Across Azure, we are seeing growing adoption across every sector."

Microsoft shares were marked 5.04% higher in early trading to change hands at $303.06 each, a move that would nudge the stock into positive territory for the past six months.

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For the three months ending in December, Microsoft said revenues for Azure, its flagship cloud division, rose 46% from last year, helping overall group revenues rise 20% to a record $51.7 billion. That topped analysts' estimates of a $50.89 billion tally, but it was notable that Azure revenues grew at a 48% clip in the prior quarter.

Still, Microsoft's bottom line rose 7.2% to $18.8 billion, as adjusted earnings rose 22.1% from last year to $2.48 per share, comfortably topping the Street consensus forecast of $2.31 per share.

"In this jittery market we will see every tech print initially viewed as glass half empty, but ultimately this remains a core cloud name to own and we believe is in oversold territory," said Wedbush analyst Dan Ives, who carries an "outperform" rating on the stock with a $375 price target. "

"It all comes down to guidance on the call, this will be the focus for the Street to gauge broader enterprise/cloud spending into the rest of 2022 in this white knuckle backdrop," he added.

Gaming revenues, Microsoft said, were up 8% while Xbox content and services revenue increased 10%.

Microsoft said earlier this month that it will pay $95 a share, or just under $69 billion for Call of Duty and World of Warcraft maker Activision Blizzard  (ATVI) - Get Activision Blizzard, Inc. Report in both the tech giant and the video game maker's biggest-ever takeover deal.

Antitrust concerns, however, could complicate Microsoft's push into the 3 billion player-strong market as companies rush to establish and monetize their subscriber bases as they move into the so-called metaverse, a hyper-realized version of the internet pioneered by Facebook parent Meta Platforms  (FB) - Get Meta Platforms Inc. Class A Report.

"The big bets we have made across content, community, and cloud over the past few years are paying off. We saw record engagement, as well as revenue this quarter. Game Pass has more than 25 million subscribers across PC and console," Nadella said. "And with our planned acquisition of Activision Blizzard, announced last week, we are investing to make it easier for people to play great games wherever, whenever, and however they want, and also shape what comes next for gaming as platforms like the metaverse develop."

Video game companies generated around $180 billion in revenues last year, an industry report published in October noted, a modest increase from 2020 levels that was lead by around $90 billion in sales from mobile gaming options.