MSFT Stock: Microsoft Cloud Services Fuel Earnings Beat

software giant microsoft (MSFT) beat forecasts for its fiscal second quarter earnings late Tuesday, but sales were weak. MSFT shares fell after the company issued disappointing guidance.


The Redmond, Wash.-based company had sales of $52.7 billion in the December quarter, earning an adjusted $2.32 per share. An analyst surveyed by FactSet had projected Microsoft’s profit would be $2.29 and $53 billion in sales. Year-over-year, Microsoft’s revenue fell 6% while sales increased his 2%.

This was Microsoft’s first revenue decline in five years since the December 2017 quarter.

But on the bright side, Microsoft’s Azure infrastructure and other cloud computing services posted better-than-expected growth during this period.

Chief Financial Officer Amy Hood said in a news release:

MSFT stock retreats on outlook

In after-hours trading on the stock market today, MSFT’s shares initially rose, but fell when the company issued a weak outlook. In recent trading, MSFT’s share price fell 0.5% to 240.77. MSFT’s share price fell 0.2% to close at 242.04 during Tuesday’s regular session.

Of Microsoft’s three business segments, Intelligent Cloud had the best performance in the December quarter. Revenue in this segment increased 18% year-over-year to $21.5 billion. This unit includes server products and cloud services such as Azure.

Azure and other cloud services posted revenue growth of 31% and 38% at constant currency. It topped the view with 37% growth in constant currency.

Meanwhile, Microsoft’s Productivity and Business Process division increased revenue by 7% to $17 billion. This division includes Office productivity software, Dynamics and LinkedIn businesses.

Windows PC and device sales sluggish

Finally, Microsoft’s More Personal Computing division saw revenue drop 19% to $14.2 billion. This unit includes Windows PC software, Xbox video games, Surface computers, Internet searches, and advertising.

Windows license revenue fell 39% in the holiday quarter amid declining PC sales. Device revenue also fell for him by 39%. Also, Xbox content and services revenue fell 12% over the period.

Jefferies analyst Brent Thill said Microsoft’s performance was “better than we feared.” He rates his MSFT stock as Buy at his 280 price target.

On a conference call with analysts, Microsoft executives expect third-quarter sales to fall short of Wall Street estimates.

Microsoft expects revenue of $50.5 billion to $51.5 billion this quarter. His $51 billion midpoint fell well short of Wall Street’s March-quarter target of his $52.4 billion. In the same quarter last year, Microsoft made his $49.4 billion in sales.

The company also expects the slowdown in Azure revenue growth to continue.

Microsoft News: Layoffs, AI investments

The earnings report comes after Microsoft announced plans on Wednesday for major job cuts and cost-savings. The company is cutting his 10,000 jobs, or about 4.5% of its workforce. Microsoft incurred $1.2 billion in charges in the just ended quarter related to severance and other restructuring charges. This reduced his earnings by 12 cents per share.

Microsoft also warned that customers are cutting back on spending amid difficult macroeconomic conditions.

At the same time, Microsoft said it will continue to add staff and invest in growth areas such as cloud computing and artificial intelligence.

On Monday, Microsoft announced a new investment worth $10 billion in artificial intelligence startup OpenAI. OpenAI is the organization behind text generator ChatGPT and image generator Dall-E. Microsoft previously invested in OpenAI in 2019 and 2021.

Microsoft provides Azure cloud computing infrastructure for OpenAI. We are also adding OpenAI models to our consumer and enterprise software products.

MSFT stock has a medium overall rating

According to the IBD Stock Checkup, MSFT’s stock ranks third out of six stocks in IBD’s Computer Software-Desktop industry group. The overall IBD rating is moderate at 55 out of 99.

IBD’s Composite Rating combines five unique ratings into one easy-to-use rating. The best growth stocks have an overall rating of 90 or higher.

Follow Patrick Saitz on Twitter. @IBD_PSeitz For more articles on consumer technology, software and semiconductor stocks, please visit here.

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