- Microsoft has finally delivered marginal revenue growth YoY.
- Bullish market sentiment was seen distinctly after the earnings release.
- Should you buy MSFT stock after the recent rally?
Microsoft's (NASDAQ:MSFT) first quarter results were, in many ways, a confirmation of sorts, of the distance the company has travelled in the last two years. Revenue from Windows has been steadily declining, while the mobile phone hardware business line is almost out of the way. Cloud-based revenues are on the rise, and their Office 365 productivity suite is on fire. Microsoft has never been less dependent on Windows revenue streams, and in all likelihood, that'l hold true for several quarters to come. So should you buy the stock now?
Growth Is Back At Microsoft
One of the biggest stories of the first quarter 2017 is that Microsoft’s revenue growth has returned after five quarters of negative growth - which seemed like an eternity. Though the revenue growth was only 0.36% or $74 million, rising from $20.379 billion in the first quarter of last year, to $20.453 billion this year, the feat was commendable. That's because Microsoft managed to grow even as revenue from its personal computing unit, which houses its Windows revenues, continued to decline.
Despite the headwinds in the PC industry, Microsoft was arguably able to hold its ground in the Windows market. Windows OEM revenue as well as Windows commercial products and cloud services revenue were down marginally during the quarter compared to the year ago. Revenue from their Phone division predictably declined by 71% and, surprisingly, Microsoft’s Gaming revenue declined by 5% as well, while Search advertising revenue continued its growth trend during the quarter.
Of the three segments, More Personal Computing continued its decline, while Productivity and Business Process and Intelligent Cloud posted strong numbers, and looks poised to keep expanding in the next several quarters. More Personal Computing still accounted for 45% of their overall numbers for the quarter, but that number is only going to get smaller and smaller in the coming years.
Cloud And The Office 365 Push
The star performer for the quarter was Microsoft’s Cloud business. The Commercial Cloud annualized run rate has now exceeded $13 billion. Microsoft calculates run rate by taking revenue from the latest quarter and multiplying by 4, which does make things look a lot better than they are, so the better way to understand the real growth in cloud-based revenue streams is to look at their historical cloud revenues and their growth trajectory over the past four quarters.
Trailing twelve months cloud revenues currently stand at $11.125 billion, significantly lower than the $13 billion they reported (as run rate). As such, you can see why Microsoft would choose to report a forward run rate rather than a trailing one. However, Microsoft has been able to sustain a 50%+ growth rate for the past three quarters, and with Microsoft Azure growing at triple digit rates last year, and in the first quarter of this year, it doesn’t look like things will slow down anytime soon.
In addition to their Cloud business, Microsoft’s SaaS or Software-as-a-Service business seems to be on a roll as well, increasing in strength. Office Commercial revenue has been on a breathtaking growth spree, hitting a 50%+ growth rate for the past several quarters. The further their productivity suite reaches out, the better it will be for other product numbers as well.
As a bundle, Microsoft’s products make a compelling reason to buy everything from Microsoft, instead of mixing and matching vendors. Success in one product is only going to increase the odds for success in another product. For example, an enterprise company - Microsoft's target customer - can sign up for Office 365, and subsequently add on Windows 10 commercial subscriptions, Azure credits and even Surface devices for their executives. By introducing Office 365 into corporate offices, Microsoft gets an entry point for all other products and services. You can also see a detailed article on the topic on my site. As such, Microsoft’s revenue growth inflection point seems to have done their stock a world of good. I remain optimistic about Microsoft stock in the near future.
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