Microsoft Corporation reported a broad-based quarterly beat. “Microsoft is executing well against its plan, growing revenue while exhibiting expense discipline,” Barclays’ Raimo Lenschow said in a report. He reiterated an Overweight rating on the company, while raising the price target from $60 to $65.
Transition To The Cloud Bearing Fruit
Following a multi-year journey to become a cloud vendor, Microsoft’s transition has started yielding results. While Office generated revenue growth, the Productivity segment should achieve growth in gross profits in the next quarter, which is expected to accelerate to double-digit growth in FY18, with further acceleration is likely in FY19, analyst Lenschow mentioned.
Azure has been gaining scale, in terms of both revenue and profitability. Lenschow added that Microsoft’s total commercial cloud revenue had reached $13 billion, which is similar in size to Amazon.com, Inc’s AWS, “and growing at a similar pace.”
Commercial cloud generated flat y/y gross margins. The analyst pointed out that gross margins had remained flat despite Azure being a lower-margin business, which indicates improvements “across the board.”
Microsoft’s capex growth is slowing, which points towards better FCF generation going ahead. “Furthermore, the winding down of the phone business is providing a nice tailwind to overall corporate margins,” Lenschow wrote.
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| Date | Firm | Action | From | To |
|---|---|---|---|---|
| Oct 2016 | William Blair | Upgrades | Market Perform | Outperform |
| Oct 2016 | Wunderlich | Upgrades | Hold | Buy |
| Oct 2016 | Goldman Sachs | Maintains | Neutral |
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