Microsoft Earnings: Strong, Including Azure, but Overall Guidance Is In Line

Key Morningstar Metrics for Microsoft

• Fair Value Estimate: $600
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Microsoft’s Earnings

Microsoft MSFT‘s first-quarter results easily topped the high end of guidance. Revenue increased 17% year over year in constant currency to $77.7 billion, compared with the high end of guidance of $75.8 billion, while operating margin was 48.9%, compared with the high end of guidance at 47.2%.

Why it matters: Results look good from all sides, with meaningful upside to our estimates on both the top and bottom lines. Revenue for all segments checked in above the high end of guidance. Critically, we see strength in Azure, in both traditional and artificial intelligence workloads.

• Near-term demand indicators are buoyant. Commercial bookings grew a staggering 111% year over year in constant currency based on surging large Azure commitments. Remaining performance obligations increased 51% year over year to $392 billion, with a weighted average duration of just two years.
• Demand for Azure AI services is surging, which is a long-term positive. While Azure remains capacity-constrained, both traditional and AI workloads were strong. Azure growth was 39% in constant currency for the quarter and surpassed guidance of 37%.

The bottom line: We maintain our fair value estimate for wide-moat Microsoft at $600 per share. We raised our Azure growth by about 100 basis points annually, which was offset by higher capital expenditures within our model. The stock remains one of our top picks.

Coming up: Second-quarter guidance is largely in line relative to both our and FactSet consensus estimates, including $80.05 billion in revenue, 45.3% operating margin, and $3.94 in EPS at the midpoints. Technically, revenue is slightly light, while margin is slightly better than our model.

Big picture: We see results as consistent with our long-term thesis, which centers on the expansion of hybrid cloud environments, the proliferation of AI, and Azure. We center our growth estimates around Azure, Microsoft 365 E5 migration, and traction with the Power Platform.