Microsoft (NASDAQ: MSFT) earned multiple upgrades after reporting fourth-quarter results. The company reported strong revenue from the usual units but the unusually bright spot was its cloud business.
Cowen set an $80 price target (“PT”) on the stock. Stifel’s PT is also $80, up by $7.00. Gross margin is the primary reason for the bullishness. As commercial cloud sales grow, profitability will improve towards the latter half of the year.
Azure is Microsoft’s bright spot. Revenue grew an impressive 97%. Conversely, revenue from the personal computing unit fell 2%, while Enterprise Services revenue dropped 3% on a drop in customer agreements. Unsurprisingly, Office sales to the consumer grew 13%.
Investors should watch the cloud unit closely. Hype for Cloud is at its peak: customers may not simply convert their operations to a cloud-only environment. Legacy applications and established networking infrastructure only serves to delay the move to cloud. Yet Microsoft’s familiarity with customers running software in-house will give it an edge. This will result in Azure revenues growing at a pace faster than competitors in the quarters ahead.
Takeaway
CEO Satya Nadella is turning Microsoft’s business around. The company will continue to reap in the reward as cash flows from the core software business and revenue grows from cloud.
