"The Strong Cloud Guidance Heard Around the World; Cloud Growth Not Slowing!!"
From a note to clients that landed on my desktop early Wednesday:
There are some moments in the financial markets that are pivotal and historical when put in context (e.g. Dimon's JPM conference calls and hand holding in the financial crisis 2008/2009 timeframe). Last night was one of them when in a white knuckle market with the whole Street (regardless of what sector you cover, value/growth, where you live in the world) watching Microsoft's earnings with a close eye, Nadella & Co. gave a robust cloud guidance "for the ages" that will calm Street nerves this morning and was a bullish data point for MSFT and importantly the whole tech sector moving forward. (emphasis his)
Our unwavering view is that despite the fear in the air given the Fed tightening backdrop and valuations falling off a cliff in tech, underlying digital transformation growth is accelerating and not decelerating into 2022 as part of this 4th Industrial Revolution. Microsoft's cloud guidance was stronger than the Street and when factoring in F/X headwinds we would characterize this as a blowout guide in terms of how investors will digest these numbers this morning.
Azure cloud growth came in at 46% which beat the Street at 45% with healthy growth trends looking ahead. Intelligent Cloud revenue of $18.33 billion beat the Street estimate of $18.30 billion. Productivity and Business Processes came in at $15.9 billion vs the Street at $15.8 billion. Personal Computing came in at $17.4 billion vs. the Street at $16.6 billion and was a nice beat for Redmond. On the bottom line, non-GAAP EPS of $2.48 was well above the Street's $2.32 estimate with a robust operating margin of ~43% (vs. Street at 41%).
We note one of the strongest metrics this quarter for MSFT was represented by robust commercial bookings growth driven by long-term Azure commitments, showing accelerating strength and an increase of 32% y/y. (also his) We see this metric as a key headline from the quarter.
Maintains Outperform rating and $375 price target.
My take: Could the chart above be a preview of Apple after-hours trading Thursday?
It’s interesting how Microsoft has primarily embrace business / enterprise subscription and services models as growth paths while minoring in Consumer computing and gaming hardware and software IMO. Obviously, Wall Street embraces this as much more lucrative, steady, and perhaps larger in the future than Apple’s consumer oriented direction.
I/we have often wondered aloud why Apple has not decided to build M1 based servers aside from the issue of robust ARM or Apple server software to run them. However, with the pandemic and constrained parts availability, production of potentially cost and parts constrained server hardware, an uncertain market for same, and the needs for higher profit (?) and more manageable demand consumer based M1 computers and iPad Pros, the above likely limits any forays into enterprise server computing. A shame really considering the M1 and beyond advantages in power consumption and size reductions, increased performance, and likely overall reliability.
Of course, once supply constraints ease or clear by 2024-2025, maybe Apple would find a ripe market for disruption and no better way then to unveil one or two Apple data centers completely run on M1 Mac computer servers for the past two years without hiccups, and showing the performance and energy savings gains that accrue with M1 servers. By then, Apple could show they would be quite capable and willing to build millions of M1 servers that could outrun and outlast current Intel based servers. Likely there would be M1 based server computers in each and every Apple car too built for an extreme automotive environment and equally capable in an industrial or commercial environment.
I’ll drink to that!
As I said, MSFT closed EOD today about where it closed EOD yesterday. And it’s up AH per Yahoo a little more than half a percent as I type. Not a resounding positive result on the stock price, and certainly not what many investors were hoping for. Hoping for something more positive for AAPL, but definitely not holding my breath….
@ Robert: Considering the huge downdraft Microsoft has already suffered, I suppose holding even can be considered a meaningful result. Unfortunately, we don’t yet know if it’s signalling that a bottom has finally been reached.
On the positive side, it’s worth mentioning that Microsoft has lately been buying back its own stock. Like Apple, they will get more bang per buck at a lower valuation. Unfortunately, it took years before an impact from Apple’s buybacks became obvious, and that’s likely to be the case for Microsoft as well. But if they keep at it, I see no reason why a meaningful impact won’t reward long term MSFT holders just like long term Apple holders are being rewarded.