Microsoft Corporation PT, Estimates Upped After Strong Results

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Microsoft posted some significant surprises in last night’s earnings report, and shares surged as a result. Today the stock climbed as much as 10.35% to $53 per share during regular trading hours. Analysts are generally positive on the earnings report, with at least one firm upping its price target for the company.

Microsoft outperforms expectations

In a report dated Oct. 22, Pacific Crest Securities analysts Brendan Barnicle and Trevor Upton said they’ve maintained their Overweight rating and $55 per share price target on Microsoft. Their bear case is $31 per share, while their bull case is $80 per share.

Like every other internationally exposed company, Microsoft faced strong headwinds from the strong dollar. Despite this, the company still posted better than expected results. Revenue was $21.66 billion, compared to Wall Street’s estimate of $20.72 billion, and earnings were 67 cents per share, compared to the estimate of 58 cents. Importantly, Microsoft’s earnings result marks a return to growth after a year and a half of solid declines.

Barnicle and Upton note that the company’s Intelligent Cloud and Personal computing segments beat expectations. Also the Commercial Other group, which includes Azure and Office 365, saw a 10% improvement in gross margin. It also appears as if Microsoft gained share in databases with double-digit growth in SQL Server and System Center. CEO Satya Nadella claimed that they increased their share of the server market during the September quarter.

Barclays ups price target for Microsoft

Barclays analyst Raimo Lenschow and team raised their target for Microsoft from $51 to $54 per share and maintained their Overweight rating on the company. In addition to improvements in sales of premium servers, they also noted that the decline in Windows revenue was not as bad as expected and that growth in the Azure cloud platform was better than expected.

The Barclays team believes that last night’s earnings report indicates that management is successfully executing on transforming the company into a cloud-focused firm. They believe Microsoft’s earnings have stabilized and that it will continue to post strong results despite the broader slowdown in IT spending among enterprises. As a result, they think investors will start seeing the company “as a safe haven” during a time when the broader market is experiencing volatility.

Microsoft’s margins surprise

Lenschow is also encouraged by management’s cost controls, as the gross and operating margins were better than expected. He noted that the guidance for the next quarter suggests that the cost of goods sold will be a bit higher, but he thinks that’s due to a mix shift in the company’s model, especially in relation to ramping the hardware business and the continuing shift toward cloud-based revenues.

Further, he thinks Microsoft is well-positioned and possibly even “the best positioned” among the large cap tech vendors because he sees its momentum in the cloud transition as being sustainable for both Azure and Office 365. He also expects continuing improvements in monetization for the datacenter products and to see Windows 10 to start inflecting as enterprises shift to the platform “in a more meaningful manner.”

Pacific Crest ups estimates

Microsoft management also provided a December quarter guide that was better than expected, with the midpoint at $25.1 billion, compared to the consensus estimate of $24.75 billion. Implied earnings were a little lower than expected, but the Pacific Crest team believes the number is conservative.

As a result, they increased their earnings estimate for the December quarter from 66 cents to 72 cents per share, putting them in line with consensus. They also upped their sales estimate for fiscal 2016 from $90.18 billion to $97.31 billion due to expected positive impacts from Windows 10. Their fiscal 2016 estimate moves from $2.69 to $3 per share, while their fiscal 2017 earnings estimate moves from $2.98 to $3.18 per share.

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