Perhaps the most consistent public company I’ve seen announced its fiscal third quarter results on Tuesday evening. Once again, Microsoft (MSFT) not only exceeded expectations at the headline level, but the company exceeded expectations top to bottom in the details of its very detailed press release. As it almost always has, or at least since CEO Satya Nadella took over in 2014.

For the three-month period ended March 31, Microsoft reported GAAP EPS of $2.22 on revenue of $49.36 billion. These higher and lower numbers both exceed the consensus. Revenue was good enough for 18% year-over-year growth, while profit was up 9% from the comparable period a year ago. Operating profit rose 19% to $20.364 billion. Gross margin of 68.4% and operating margin of 41.3% both beat Wall Street.

They said…

“Going forward, digital technology will be the key element that powers global economic output. Across the technology stack, we are expanding our opportunities and taking part as we help customers differentiate themselves, strengthen their resilience and to do more with less.”

– Satya Nadella, CEO of Microsoft

“Continued customer engagement with our cloud platform and strong sales execution led to above-expected commercial bookings growth of 28% and Microsoft Cloud revenue of $23.4 billion, up 32 % year over year.”

– Amy Hood, CFO of Microsoft

Sector performance

Productivity and business process

Revenue rose 17% to $15.789 billion, beating estimates.

Operating profit rose 19% to $7.184 billion, beating estimates.

– Office Commercial products and cloud services revenue increased 12%, with Office 365 up 17%. Products saw a 28% decline as customers moved to the cloud.

– Office Consumer products and cloud services revenue increased 11%, driven by Microsoft 365 Consumer subscriptions. The number of subscribers increased by 16% to reach 58.4 million.

– LinkedIn revenue grew 34%, driven by a strong job market and advertising.

– Dynamics products and cloud services revenue increased 22%, driven by 35% growth in Dynamics 365.

smart cloud

Revenue rose 26% to $19.051 billion, beating estimates.

Operating profit rose 29% to $8.281 billion, beating estimates.

– Server products and cloud services revenue increased 29% driven by Azure and other cloud services, Azure and other cloud services increased 46%. Server products increased by 5% thanks to hybrid solutions.

– Business services revenue increased 5% driven by support services.

More personal computing

Revenue rose 11% to $14.52 billion, beating estimates.

Operating profit rose 7% to $4.889 billion, in line with estimates.

– Windows revenue increased 11% driven by Windows OEM and Windows Commercial. Windows OEM increased by 11%, while Windows Commercial increased by 14%.

– Search and news ad revenue increased by 23%. Excluding traffic acquisition costs, this activity grew by another 23%.

– Gaming revenue increased by 6%. Xbox content and services grew 4%. Xbox hardware grew by 14%.

– Surface revenue increased by 13%.

Fundamentals

Microsoft produced operating cash flow of $25.386 billion and free cash flow of $20 billion, easily exceeding Wall Street expectations on both counts. The company ended the quarter with net cash of $104.693 billion and current assets of $153.922 billion. Current liabilities total $77.439 billion. That leaves the company’s current ratio at a comfortable 1.35. Total assets of $344.607 billion ($265.888 billion excluding goodwill and net intangible assets) easily exceeds total liabilities less equity of $181.683 billion. Long-term debt stands at $48.177 billion, which could be repaid more than twice in cash.

Orientation

First of all, looking at the current quarter… Microsoft had a negative impact of $110 million on prospective revenue due to the war in Eastern Europe. The company has also factored in the Covid restrictions in China which will likely continue unless those closures extend into next month.

Microsoft is so good at providing specific advice. It really makes parsing much easier. Breakdown of revenue expectations by segment… Company estimates productivity and business processes generate $16.65-16.9 billion, intelligent cloud generates sales 21.1-21.35 billion and additional personal computing between $14.65 and $14.95 billion. The only blemish from any of the segment businesses really came from gaming, which is expected to decline this quarter. Total aggregate revenue of $52.4 billion to $53.2 billion for the period, placing the midpoint almost precisely on the current Wall Street consensus of $52.86 billion.

Wall Street

I can find 12 sell-side analysts who are both rated five stars by TipRanks and have given their opinion on Microsoft since these results were released last night. Because there are so many, I excluded all analysts rated four stars or less. Of the 12, there are 11 “buy” odds or buy equivalent odds and one equivalent hold odds which is actually an “in-line” odds.

The average target price of the 12 is $351, with a high of $380 (Brad Erickson of RBC Capital) and a low of $320 (Jack Murphy of JP Morgan). Interestingly, Jack Murphy is one of the “buyers”… the “hold” or “in-line” came from Kirk Materne at Evercore ISI which has a target price of $330 on MSFT.

My minds

First of all, I have always been a fan of this company, this CEO and this CFO. I’m probably biased when it comes to Microsoft. I re-entered the name last night after the closing bell rang and the company reported. Not a great execution. I walked in at $270 and took half the post off at $282 and changed times before the opening bell this morning. I think I’m hanging on to the scale.

I feel like I say this every quarter… It’s hard to imagine a company operating at such a level of excellence in such a variety of activities as Microsoft does on such a regular basis. That said, the environment remains challenging for equities, especially software stocks. Do you think the business world will stop relying on Azure? Me niether.

Readers will note that in 2022, MSFT performed an almost accurate 31.8% Fibonacci retracement of the entire rally from March 2020 to November 2021. In 2022, however, after finding support, it appears that MSFT has formed a basic model…

Make no mistake, this stock, which is trading below its 21-day EMA, 50-day SMA and 200-day SMA, remains under pressure. I see the $270 level as the sweet spot at least until one of these key averages is taken and held. The stock’s full stochastic oscillator looks awful, relative strength is “meh”, and the daily MACD isn’t showing any love yet.

The current Microsoft plan

– Target price: $350

– Pivot: $292 (50 days SMA)

– Add: $275 up to $270

– Panic: $268 (bracket broken)

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