Microsoft On Cloud 9 As Momentum Continues In Q1

Reviewing
Microsoft Corporation MSFT
's fiscal year
first-quarter results,
KeyBanc Capital Markets said momentum continued into the quarter, aided by strong performance by its
cloud business.

As such, the firm maintains its Overweight rating on shares of the company and upped its price target from $82 to $94.

In pre-market trading, shares of Microsoft were up 6.70 percent at $84.04.

Analysts Brent Bracelin, Clarke Jefferies and Alyssa Johnson noted that total revenues rose 11 percent year over year, excluding forex, to $24.5 billion, with Azure revenue soaring 90 percent. The analysts pointed to the 55 percent growth of the commercial cloud revenue to reach the $20 billion goal set by the management in 2015.

Commercial Office 365 revenues rose 42 percent, and Dynamics 365 revenues increased 69 percent, the analysts added.

See also: Attention Microsoft Investors: Get Excited About These 3 Catalysts

The analysts also noted impressive gross margin performance of the cloud business, with margins expanding to 57 percent from 52 percent in the previous quarter. This, according to the analysts, demonstrated that business' potential to produce attractive leverage following years of heavy investment.

KeyBanc Capital Markets is increasingly confident in margin expansion, given a more favorable cloud gross margin, forex tailwinds and the prospects of LinkedIn being accretive to earnings per share ahead of schedule.

The firm raised its revenue estimates for the current fiscal and the next. Additionally, the firm said it sees potential for free cash flow growing in double digits.

Based on the firm's new 2019 free cash flow estimate of $5.01, the firm raised its price target, as it shifted to using fiscal-year 2019 as a basis for valuation.

The firm said it Overweights Microsoft on cloud momentum and rising free cash flows.

"Heavy cloud investments have improved the revenue growth profile and are reaching critical mass, and could spark a multiyear margin-expansion cycle on free cash flows," the firm said.

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Posted In: Analyst ColorLong IdeasNewsPrice TargetReiterationAnalyst RatingsMoversTrading IdeasAlyssa JohnsonBrent BracelinClarke JefferiesKeyBanc Capital Markets
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