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Analyst breaks down Microsoft's Q3 earnings beat

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Peter Hanks, an anlyst at DailyFX, analyzes what Microsoft's earnings beat means for the future of the stock.

Video Transcript

ADAM SHAPIRO: All right, so we're watching shares of Microsoft fall after hours about 2%, between 2.5% after they reported their quarterly earnings. Let's bring in Peter Hanks, daily FX analyst. It's good to have you here. And I want to jump into what they told us, Peter, because it was cloud growth that we were all paying attention to.

And we know that revenue in cloud growth was pretty dramatic. But the pace of growth-- is that, perhaps, one of the reasons we're seeing a bit of a sell-off? Because it says here, server products, cloud services revenue increased 34%, driven by Azure revenue growth of 51%. But I'm recalling a time when I think they had growth where there was a 60 number before we were saying percent. Is it legitimate to say-- is the pace of the growth in the cloud slowing down for them?

PETER HANKS: Yeah, I think the pace is a major-- I wouldn't say concern, but certainly a reason for maybe the lack of positive reaction in these earnings. Just given the competition in the space and given the valuation that some of these large technology stocks have, you really-- even if you do blow away estimates, they're going to find any little reason to ding you for. And it seems like growth rates may be one this time around.

EMILY MCCORMICK: This is Emily. I do want to ask a little bit about future catalysts here for Microsoft. Of course, we did just have the company announcing earlier this month, I believe, that they were acquiring the cybersecurity company RiskIQ. What do you see, of course, outside of the cloud computing as being the big drivers of growth here for the company going forward?

PETER HANKS: Well, I think you don't want to look too far away from cloud. That's a major one. And it is a very competitive space, as I mentioned. And there's still a lot of market share to be scooped up. As in relation to Google and Amazon, I think Microsoft needs to continue to execute on that cloud market share, and continue to roll out Azure, and maybe keep a leg up on Amazon. I really would be hesitant to turn away from cloud in terms of major growth. They do have a pretty formidable hardware business still. But I think, really, the margins are going to come in the future from cloud.

ADAM SHAPIRO: It says here that Microsoft 365 consumer subscribers increased to 51.9 million. And this is part of their cloud offering. It was up, the revenue, by the way, 18%. It's going to get to a point, once the cloud growth really does continue to decelerate and kind of stabilize, where we're going to be talking about the old and boring and going back to Microsoft Office. Should we be paying attention to that number now as opposed to waiting for that day?

PETER HANKS: It wouldn't hurt, but I do think it's quite early still. There's still room to be grown and there's still market share to be grabbed, as I mentioned. So you know, it is a concern down the line. But Microsoft over the years really hasn't made a step too wrong.

And they've shown their ability to either grow through internal development or through acquisition. And their ability to do that in the past should not be discounted going forward. So, yes, keep an eye on those legacy businesses, if you will. But also look for what they'll be going to next-- if it is another acquisition or maybe a new program developed internally.

EMILY MCCORMICK: You mentioned a new acquisition. Who do you think might potentially be a target here for Microsoft in the near-term?

PETER HANKS: That's a little bit out of my wheelhouse. I really like to look at Microsoft in terms of broader technology sentiment. I don't have a hard company for a potential acquisition target at this time.

ADAM SHAPIRO: Peter Hanks, daily FX analyst, thank you for joining us here on Yahoo Finance.