Strong Microsoft Revenue Rising Market

It was a choppy week for the market, but it came out strong on Friday, helped by a better-than-feared inflation report and strong returns in Magnificent Seven stocks.

On the inflation front, the March Personal Consumption Expenditures (PCE) index rose to 2.7% in March from 2.5% in February, but was not as bad as expected. Many feared this figure would be higher given the 3.4% first quarter PCE growth released alongside Thursday’s GDP report. Still, the 2.7% rise in March was still higher than the 2.6% rise economists had expected.

Another good news has arrived. microsoft (NASDAQ:MSFT) posted solid fiscal third quarter earnings for the period ended March 31.

The combination of these two factors led to an upward trend in the market Friday, led by the Nasdaq Composite Index, which rose more than 300 points (about 2%) on Friday morning.

Microsoft beats sales and profits

In its fiscal third-quarter earnings report released after the close on Thursday, Microsoft reported results that easily beat analysts’ estimates. Sales increased 17% year-over-year to $61.9 billion, and net income increased 20% to $21.9 billion, or $2.94 per share.

The biggest driver of Microsoft’s revenue growth was its intelligent cloud business, which surged 21% year-on-year to $26.7 billion. Within this business, server products and cloud services revenue increased 24%, driven by a 31% increase in Azure, its artificial intelligence-powered cloud segment.

Overall cloud business revenue across multiple segments increased 23% to $35.1 billion, accounting for approximately 56% of Microsoft’s total revenue for the quarter. The cloud business gross profit ratio was 72%, the same as the previous quarter and the same period last year.

Microsoft’s Productivity and Business Processes revenue increased 12% to $19.6 billion, and Personal Computing revenue increased 17% to $15.6 billion. Within the PC segment, Windows revenue increased 12%, as did search and advertising revenue. Xbox content and services revenue grew 62%, but that was mostly driven by the recent Activision acquisition.

“Microsoft Copilot and the Copilot Stack—across everyday productivity, business processes, developer services, models, data, and infrastructure—are orchestrating a new era of AI innovation to drive better business outcomes across all roles and industries.” Microsoft Chairman and CEO Satya Nadella attending the earnings call.

Nadella added that Azure gained market share in the quarter as more customers used the platform to develop their own AI solutions.

“Our AI innovation continues to build on our strategic partnership with OpenAI. “More than 65% of Fortune 500 companies are currently using Azure OpenAI services,” he added. “Microsoft Copilot and the Copilot Stack are orchestrating a new era of AI innovation to drive better business outcomes across all roles and industries.”

The outlook is better than expected

Microsoft stock rose 3% on Friday, giving the stock a return of about 11% year to date.

Investors were encouraged by the results as well as Microsoft’s outlook for the fiscal fourth quarter and full fiscal year. The company expects revenue of $28.4 billion to $28.7 billion from its Intelligent Cloud segment, up from $24 billion in the same quarter a year ago. The fiscal fourth quarter estimates are slightly higher than analysts had expected.

More specifically, the Azure business is expected to grow revenue by 30-31% this quarter, which also exceeds expectations.

For the full fiscal year, Microsoft expects double-digit revenue and operating profit growth and expects operating margins to decline by about a point. Additionally, capital expenditures for the fiscal year are expected to be higher than the previous year due to continued investments in cloud and AI infrastructure.

Microsoft received a significant price target increase after posting its latest earnings results, and remains a consensus buy with an average price target of $475 per share, about 15% above the current price.

Trading at around 36 times earnings, Microsoft’s valuation is in a decent range, and its momentum makes it look like it has room to run.