Wedbush's Daniel Ives on Microsoft's Dec. 2021 quarter

"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?

17 Comments

  1. David Emery said:
    Microsoft in particular is benefiting from pushing most people to “Office365 in the cloud”. That’s an offering that Google and Amazon can’t match. CIOs are comfortable with Microsoft administration and happy to get out of the distributed upgrade cycle.

    1
    January 26, 2022
  2. Robert Paul Leitao said:
    Microsoft’s successful transition to a cloud enterprise is an impressive accomplishment. Even with today’s nearly 5% gain in response to yesterday’s earnings report, there’s plenty of headroom between where shares are trading now and the analyst price targets I’ve viewed. I believe Dan Ives has selected Apple and Microsoft as his top tech picks for 2022. His enthusiastic commentary speaks volumes. With the recent sell-off and the very strong earnings report, I may be a buyer in the current trading range.

    2
    January 26, 2022
  3. Robert Paul Leitao said:
    @PED I don’t know if the response to Apple’s quarterly results and March quarter guidance will be similar to the market’s positive response to Microsoft’s earnings. It will depend, in part, on how closely results track to market and analyst expectations. Long-term I have no concerns about Apple’s share price performance. One thing is clear: All tech enterprises are no created equal. There’s a huge gulf between “quality tech” and much of what populates the Nasdaq at this time as interest rates rise and the economy exits the QE era.

    0
    January 26, 2022
    • Bart Yee said:
      @Robert
      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.

      0
      January 26, 2022
      • Robert Paul Leitao said:
        Bart: Good observation. The power efficiency of Apple silicon would make for an attractive server option. I believe we are in the early stages of Apple chip development and servers would be an organic outgrowth of the effort. On MSFT, in my view it’s easier for analysts to scale the potential for cloud services growth. Microsoft also has analysts assigned that understand software and services more so than several of the hardware-focused analysts currently covering Apple. That’s why I think there’s more interest expressed by some analysts in the much-anticipated new wearable from Apple than solid analysis on the trajectory for services revenue growth beyond the stated “tough compares” this fiscal year.

        1
        January 26, 2022

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