Microsoft (NASDAQ: MSFT) Saves The Day, For Now

With the major indices being slammed right down towards their lows of the year this week, there was a lot riding on Microsoft’s (NASDAQ: MSFT) earnings last night. The tech giant reported their fiscal Q3 numbers after the bell and they were, for the most part, viewed favorably by the street. 

While the earnings per share number was slightly below analyst expectations, Microsoft registered a beat on the consensus for their revenue, which was up more than 18% year on year. This was their thirteenth revenue beat in a row, a record that more than just Microsoft investors will be happy is still standing. Looking at the individual segments, we can see they performed well across the board. Revenue from Productivity and Business Processes increased 17%, revenue from Intelligent Cloud increased 26%, and revenue from More Personal Computing increased 11%. The icing on the cake was the revenue growth in the company’s cloud service product, Azure. Those numbers jumped 49%, a rate of increase not seen in almost two years. 

One For The Ages

Wedbush Securities analyst Dan Ives wasted no time with commenting on the results, noting that the “guidance provided by Satya Nadella and team was one for the ages and should help calm the fears of investors.” He added that after a 3.5% drop in the Nasdaq index yesterday, Microsoft’s numbers will calm Wall Street’s nerves this morning as it was a bullish data point for both the company and maybe more importantly the whole tech sector moving forward. 

Microsoft shares were certainly in need of a good result, as they’ve been under constant selling pressure since last November. Going into last night’s report, they were down more than 20% from that month’s all-time high and in danger of breaking down to fresh lows. In Wednesday pre-market session though they were up as much as 5%, indicative of a bid that will hopefully spread out across the rest of the market. 

Ives reiterated his Buy rating and $340 price target, which is only slightly below that of Brad Sills from Bank of America. Sills has a $365 target in mind which suggests there’s upside to be had from current levels in the region of 35%. Were both of these price targets to be achieved in the coming months, Microsoft stock would be back up at fresh all-time highs. Notwithstanding the current risk off sentiment in equity markets, Satya Nadella, chairman and CEO of Microsoft, sees this as a very real possibility. 

Holding The Line

In his post release comments, Nadella said that “going forward, digital technology will be the key input that powers the world’s economic output. Across the tech stack, we are expanding our opportunity and taking share as we help customers differentiate, build resilience, and do more with less.” Microsoft’s CFO Amy Hood echoed the bullish tone, saying that “continued customer commitment to our cloud platform and strong sales execution drove better than expected commercial bookings growth of 28% and Microsoft Cloud revenue of $23.4 billion, up 32% year over year”. 

The pressure is now on the likes of Apple (NASDAQ: AAPL) to come through and help stem the flow of selling that has taken tech stocks down to their lowest level since the start of last year. A combination of soaring inflation, rising interest rates, pandemic hangovers, and the Russian invasion of Ukraine have all come together to make stocks one of the least appetizing assets to own so far in 2022. 

Wedbush’s Dan Ives urged caution earlier this week and recommended investors be super picky with what stocks they hold and add to at this time. He said that “smart investors should be focusing on companies that have significant free cash flow," like Microsoft and Apple. He added that "we believe large cap tech will outperform small caps along with a rotation to the tech stalwarts with defensive business model and high free cash flow”. Microsoft’s free cash flow has passed muster, let’s see what Tim Cook and co can do next.