Here's Why Microsoft (MSFT) Stock Looks Strong After Q2 Earnings

Microsoft MSFT shares dipped roughly 2% Thursday despite posting solid fiscal second-quarter earnings results after the closing bell Wednesday. The company might have been dinged because its PC sales slipped on the back of an overall production shortage of vital chips from the likes of Intel INTC. Aside from that, Microsoft appears strong, especially as Apple AAPL looks to be headed for a rough patch.

Overview

Microsoft surpassed Apple in late 2018 as the world’s most valuable company. The firm last held that crown in 2003, driven by the success of Windows. Today, Microsoft has expanded into everything from IoT to cloud computing, while remaining a software and personal computer giant.

Microsoft now competes directly against cloud powerhouse Amazon AMZN with its Azure division. The company has also expanded its search advertising business and the Xbox-driven gaming unit has pushed into the future with its Netflix NFLX-style Game Pass. Meanwhile, Microsoft acquisitions such as LinkedIn have helped the company immensely.

Microsoft’s quarterly revenues jumped roughly 12% from the year-ago period to hit $32.471 billion, which inched by our current Zacks Consensus Estimate of $32.45 billion. This matched the year-ago period’s 12% top-line expansion and came in below last quarter’s 19% climb.

At the bottom and of the income statement, MSFT’s adjusted quarterly earnings surged 14% to reach $1.10 per share. This marked a sequential slowdown from Q1 fiscal 2019’s 36% bottom-line expansion, but came in $0.01 above our estimate.

Details

The firm’s Windows OEM (original equipment manufacturer) segment saw its revenue sink by 5%. As we mentioned at the top, some of the downturn was blamed on a shortage of chips. Microsoft’s finance chief Amy Hood said in an interview that the limited chip supply “constrained an otherwise healthy PC ecosystem.”

Despite that downturn, Microsoft’s More Personal Computing unit popped roughly 7% from the year-ago period to reach $12.993 billion, which did fall just below our $13.086 billion NFM estimate. Once again, the Xbox unit stood out with revenue up 31%.

Moving on, MSFT’s Intelligent Cloud revenues surged 20% to reach $9.378 billion and come in above our $9.295 billion NFM estimate. This unit was driven by a 76% surge in Azure revenues, which matched last quarter’s growth in the division that competes directly against Amazon’s AWS. Investors should note that this marked a slowdown from Azure’s 98% climb in the year-ago quarter. But this is more likely due to the law of large numbers than a downturn in Microsoft’s growing cloud business since overall Intelligent Cloud revenues topped Q2 2018’s 15% expansion.

Lastly, MSFT’s Productivity & Business Processes unit, which includes Office, LinkedIn, and more, jumped over 13% to $10.100 billion, which just beat our $10.096 billion estimate.

Outlook

Looking ahead, the firm’s Q3 fiscal 2019 revenues are projected to jump 11.14% to reach $29.81 billion, based on our current Zacks Consensus Estimate. MSFT’s current full-year revenues are projected to surge 12.44% to reach $124.09 billion. Peeking even further ahead to fiscal 2020, the tech giant’s revenues are expected to climb over 10% above our current year estimate to reach $136.51 billion.

Meanwhile, the company’s fiscal 2019 earnings are projected to jump 14.43%, while fiscal 2020’s EPS figure is expected to climb 11.42% above that. With that said, it seems like Microsoft is poised for double-digit top and bottom-line growth at a time when some tech powers, like Apple, seem influx (also read: What to Expect from Apple in 2019 After Q1 iPhone Revenue Tumbled).

Let’s also not forget that Microsoft is a dividend payer and its stock rested at roughly $104 a share Thursday. This marked over an 11% downturn from its 52-week high and could set up a solid buying opportunity for those high on MSFT.

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