5 Microsoft Analysts Break Down Q2 Beat As More Organizations Shift To Cloud

Microsoft Corporation MSFT reported a 50% increase in its Azure cloud computing service amid a work-from-home shift brought on by the pandemic in its second-quarter report Tuesday.

Microsoft also said its quarterly XBox sales, from two new consoles released in November, were up 86% despite difficulty finding software during a global chip shortage.

Microsoft's gross margins for its commercial cloud business increased to 71% this quarter compared to last year's 67%.

Microsoft reported year-over-year revenue of $43.1 billion, beating the Street consensus estimate of $40.2 billion.

Earnings per share came in at $2.03, 23.8% better than the Street consensus estimate of $1.64.

Morgan Stanley On Microsoft 

Morgan Stanley analyst Keith Weiss highlighted Microsoft’s 15% year-over-year constant currency growth, noting that Microsoft’s “out-performance across every major product line in Q2 highlights Microsoft's strong secular positioning as IT spending ramps back up.”

The analyst named four primary growth opportunities for Microsoft:

1) Azure and Azure Synapse, both of which Weiss sees as positive for future revenue growth as large corporations continue to move toward digital transformation.

2) Microsoft 365 expansion as an estimated 400 million more information workers shift to cloud ecosystems.

3) Security services and Microsoft’s Sentinel SIEM solution, as the move to digital working environments will require heightened security software, as highlighted by the SolarStorm hack.

4) Microsoft’s Power Platform, with its suite of broad cloud-based applications that Weiss said will continue to gain active users. With 11 million users, this section of Microsoft’s business has grown by 95% year-over-year.

Raymond James On Microsoft 

Robert Majek of Raymond James highlighted Micrsoft’s strong guidance and said "the company is now guiding Q3 CC revenue growth to a mid-point of 14.5% y/y, materially ahead of historic growth rates."

Microsoft has continued growth in three main areas — Azure, gaming and 365 — that he said offer long-term growth  for a company that has a "continually strengthening competitive position as one of three leading hyperscale cloud vendors."

Rosenblatt Securities On Microsoft 

Analyst Ryan Koontz highlighted Microsoft’s growth in its Teams application, which expanded to 60 million users across mobile devices.

The analyst sees Teams as a threat to competitors such as Zoom Video Communications Inc ZM and Ring Central RNG . Koontz also noted that following Amazon Inc. AMZN, Microsoft will extend the life of its existing infrastructure from two to four years.

Wedbush On Microsoft 

Wedbush’s Daniel Ives called Microsoft’s earnings report a “Picasso-like performance for the ages” and said that Microsoft is the leader of a “cloud growth party” that is only just beginning.

Ives sees Azure and 365 as being the biggest areas of growth over the next year, and noted that 55% of workloads will take place in the cloud by 2022 compared to the 35% that do today.

Ives referred to Microsoft’s intelligent cloud software Azure as “the star of the show.”

Piper Sandler On Microsoft 

Analyst Brent Bracelin of Piper Sandler “came away impressed by 50% Azure growth and 51% gaming growth that contributed to a strong quarter on a $2.9B revenue beat.”

The analyst said adoption of Microsoft’s cloud platforms is growing at a rate of 34%, which is ahead of the overall cloud industry growth of 30% year-over-year.

Bracelin highlighted the 365 component of Microsoft’s software portfolio and its over 10 million contracts that helped to offset slower year-over-year growth in Windows revenue. 

BofA Securities On Microsoft 

Analyst Brad Sills sees the most strength coming from Microsoft’s Azure cloud platform and said its reported 10 million contracts with large organizations supports Sills’ “view that Azure is increasingly trusted by large enterprises for more mission critical workload.”

Microsoft’s guidance of a 15% growth in the productivity and business processes segment of its portfolio that beat BofA's estimate of 7%.

Microsoft Ratings, Price Targets 

Morgan Stanley reiterated an Overweight rating on Microsoft and raised the price target from $260 to $285.

Raymond James reiterated a Strong Buy rating and increased the price target from $235 to $275. 

Wedbush maintained an Outperform with a price target increased from $275 to $285. 

Piper Sandler maintained an Overweight rating and raised its price target from $245 to $300.

BofA Global Research reiterated a Buy rating and raised its price target from $256 to $280.

The Microsoft Teams platform. Courtesy photo. 

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