By Emily Bary
Analysts impressed with margin improvement, Azure reacceleration
Thursday brought more praise for a near-universal favorite among Wall Street analysts.
"In 20 years of covering Microsoft (MSFT) we have seen a lot of good quarters, but last night was a masterpiece that in our opinion might have been Redmond's best performance we have seen and one for the earnings history book," wrote Wedbush analyst Daniel Ives as the stock headed about 2% higher.
The cheery tone on Wall Street comes as the tech giant easily topped earnings and revenue expectations () for the December quarter on the back of strong cloud growth and the end of support for Windows 7, which drove demand for Windows 10 upgrades.
Opinion: Tesla is finally delivering on Musk's promises, which are only getting bigger ()
Microsoft's results late Wednesday gave Ives the impression that the company is starting to "close the gap" with Amazon.com Inc.'s (AMZN) AWS, the leader in cloud computing, as Microsoft sees an acceleration in corporate spending. The quarter "speaks to an inflection point in deal flow," continued Ives, who rates the stock at outperform and raised his price target to $210 from $195.
See also: Amazon Web Services sees stronger competitors, but believes it will still rule the cloud ()
"What more could you want?" asked Bernstein's Mark Moerdler, besides margin improvement, an acceleration in Azure cloud-computing growth, and general strength across the various business units.
On the margin front, he pointed to Microsoft's roughly 5-point improvement in year-over-year gross margins, which he said likely came as a surprise to many investors.
"We believe that the general belief was that Azure was going to pull down Commercial Cloud margins and Commercial Cloud was going to pull down overall gross margins [which] has not happened, supporting the strong beat on EPS," he wrote. "In addition, many have been concerned that as cloud becomes a large part of revenue the company would need to grow [operating expenses] at a similar or higher rate than revenue, which has not occurred to date."
Moerdler has an outperform rating on Microsoft shares and he increased his price target to $203 from $174.
Opinion: Facebook stock is falling because it is a victim of its own success ()
For J.P. Morgan's Mark Murphy, the results seemed to align with his earlier thesis that Microsoft's Azure now has a lead over its rivals in picking up new workloads.
"Consistent with this positive feedback, Azure growth accelerated to 64% constant-currency growth, ahead of last quarter's 63%," he wrote. "We find it exceedingly rare and unexpected for anything of this scale ($18 billion run-rate) and trajectory to accelerate, even by a point."
Murphy did acknowledge that "it is never the case that everything is perfect for Microsoft," pointing to underperformance for the search and Surface categories. "However the full equation, including the size of the cloud [total addressable market] and the momentum Microsoft enjoys, is very impressive and we reaffirm it as one of our three top picks," he continued.
He rates the stock at overweight while hiking his price target to $200 from $169.
Of the 34 analysts tracked by FactSet who cover Microsoft's stock, 31 rate it a buy and the rest call it a hold. The average price target listed on FactSet stands a $193.53, about 12% above recent levels.
Microsoft's stock has increased 19% over the past three months, as the Dow Jones Industrial Average has added 5%.
-Emily Bary; 415-439-6400; AskNewswires@dowjones.com
(END) Dow Jones Newswires
January 30, 2020 11:18 ET (16:18 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.