The Microsoft (MSFT) stock is usually a safe bet when it comes to quarterly reports. For years, it has been able to clearly exceed analysts’ forecasts. This time, the company did not manage to do so. But the share still climbed afterwards. In the following, I’ll show you the reasons why.
Quarterly Results: Strong US Dollar Puts The Brakes On
Microsoft increased its sales by 12% to $51.87 billion. Adjusted for currency effects, this would have been +16% growth. The negative effect of the strong US dollar was above average for Microsoft. This is because the group generates more than half of its sales abroad.
In terms of earnings, the negative exchange rate effect also ensured that Microsoft slightly missed analysts’ forecasts of $2.22 per share with $2.18 per share.
Annual Results: Impressive Profit Margins
For the 2021/2022 fiscal year ending in June, total revenue was $198.3 billion (+18%) and net income was $72.7 billion (+19%). Despite the negative exchange rate effects included therein, these are very impressive figures. This is particularly true of the enormous profit margin of almost 37%. That’s a figure that 99% of all companies can only dream of.
Individual Microsoft Divisions Perform Very Differently
The three major divisions showed very different trends. The growth driver remains the “Intelligent Cloud” segment, which is now the largest. Here, sales climbed by +20% to $20.91 billion. The Azure cloud platform, which is part of this segment, even achieved +40% revenue growth.
The “Productivity and Business Processes Segment” (including Office products, Skype and LinkedIn) also performed quite well, growing by +13% to $16.60 billion.
On the other hand, the “More Personal Computing” segment (including the Windows operating systems and the Xbox games console) continues to lose importance, with sales increasing by only +2% to $14.36 billion. The intended takeover of the games manufacturer Activision Blizzard (ATVI) should soon give this segment new momentum. Activision Blizzard owns well-known video games such as Call of Duty and World of Warcraft.
While the results for the past quarter were only moderate, Microsoft was able to remain positive with its outlook. Chief Financial Officer Amy Hood pointed out that Microsoft continues to expect double-digit growth rates in sales and profits.
In addition, numerous long-term and lucrative contracts (each with a volume of more than $100 million) were made in the cloud area with corporate customers in the past quarter.
Investors Are Very Happy With Microsoft Bottom Line
In any case, investors attach much more importance to the outlook than to the quarterly results, especially as the negative impact of the currency effect is unlikely to last. Following the presentation of the figures, the Microsoft share gained 7%.
With a price-earnings ratio (P/E) of 25, the Microsoft share is not a bargain, but it is not expensive either. As is well known, quality has its price and the valuation premium is quite low here. Microsoft should continue to benefit from the ongoing cloud boom for years to come.
Analysts expect a significant increase in profits in the coming year. That would bring the P/E ratio down to 21. In my view, that makes the stock still attractive for long-term investors.