Microsoft analyst says investors should see rewards for waiting, given expectations for a second-half ramp and the reasonable valuation.
Microsoft Corp. ($MSFT) shares slid more than 5.50% on Thursday as the software giant’s lackluster guidance weighed on the stock.
Key Numbers
Redmond, Washington-based Microsoft reported first-quarter earnings per share (EPS) of $3.30 compared to $2.99 a year ago. Microsoft’s top-line grew 16% year-over-year (YoY) to $65.59 billion.
Both figures surpassed the consensus estimates of $3.10 per share and $64.57 billion, respectively.
Gross margin contracted year-over-year from 71.16% to 69.35%.
CEO Satya Nadella said AI-driven transformation is changing work, work artifacts, and workflow across every role, function, and business process.
“We are expanding our opportunity and winning new customers as we help them apply our AI platforms and tools to drive new growth and operating leverage,” he added.
Cloud Strength
Intelligent Cloud revenue rose 20% YoY to $24.1 billion, with server product and cloud services revenue climbing 23%, and Azure and other cloud services revenue growing 33%.
Azure public cloud revenue growth, however, trailed the 35% jump reported by Alphabet, Inc. ($GOOGL) ($GOOG) for its Google Cloud business.
“Strong execution by our sales teams and partners delivered a solid start to our fiscal year with Microsoft Cloud revenue of $38.9 billion, up 22% year-over-year,” said CFO Amy Hood.
Among the other segments, Productivity and Business Processes revenue rose 12% to $28.3 billion and More Personal Computing revenue increased a steeper 17% to $13.2 billion.
The former includes contributions from Microsoft 356 commercial products and consumer products and LinkedIn, while the latter segment gets revenue from Windows OEM and devices, Xbox content and services, and search and news advertising revenue, excluding traffic acquisition costs.
Forward Guidance:
Hood said on the earnings call that second-quarter Intelligent Cloud revenue will likely rise 18%-20% in constant currency, with Azure revenue expected to be in the 31%-32% range.
“Our AI business is on track to surpass $10 billion of annual revenue run rate in Q2,” she said.
Commenting on the results, Morgan Stanley analyst Keith Weiss said demand signals remain strong with 23% constant currency bookings growth but supply constraints limit Gen AI-related business.
“That said, with management confident in a 2H capacity ramp and MSFT trading at 25X CY26 GAAP P/E, investors should see rewards for waiting,” he added.
Weiss said second-quarter revenue guidance came in below consensus, with much of the shortfall at the More Personal Computing segment. “EPS at the mid-point of $3.11 fell below consensus at $3.25 due to larger Other Income losses due to Microsoft’s equity investment in OpenAI,” he added.
The Stock
As of 11 am ET, Microsoft shares plunged 5.70% to $407.86.
Retail mood remains buoyant with the sentiment “extremely bullish” (80/100) on Stocktwits amid “extremely high” message volume.
A retail trader touted the stock weakness as “once in a lifetime opportunity.”
Another said he would accumulate more of the shares.
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