Just as the number of headlines warning about a bubble in tech starts to increase, out comes Microsoft (NASDAQ: MSFT
) with stellar numbers to silence the critics
. Or at least quieten them down for another while. The tech giant reported its fiscal Q2 numbers
after Tuesday’s session and beat even the most optimistic expectations. GAAP EPS was almost 25% higher than the consensus while revenue was also comfortably ahead as it came in 16% higher year on year. Not a bad showing for a company with a market cap of almost $2 trillion.
Shares jumped as much as 6% in the after hours session and look set to open at all time highs today. This will mean they’re up around 10% on the year already and off to a great start. A large part of the jump was surely fuelled by management giving guidance to the upside for next quarter’s revenue, with full year revenue expected to grow in the double digits.
Bright Days Ahead
The company’s CFO, Amy Hood, understandably struck a bullish tone with the report, when she said “accelerating demand for our differentiated offerings drove commercial cloud revenue to $16.7 billion, up 34% year over year. We continue to benefit from our investments in strategic, high-growth areas.”
CEO Satya Nadella spoke to the strong potential for continued growth ahead when he added “what we have witnessed over the past year is the dawn of a second wave of digital transformation sweeping every company and every industry. Building their own digital capability is the new currency driving every organization’s resilience and growth. Microsoft is powering this shift with the world’s largest and most comprehensive cloud platform.”
Microsoft is now one of the few companies posting quarterly revenues north of $40 billion, with much of Q2’s number being driven by strong growth in their Azure product which was up 50% on the year. This revenue line is continuing to accelerate forwards, which is a welcome change of pace from the deceleration it was experiencing before the pandemic. Like so many tech companies, COVID-19 has in many ways been a blessing in disguise.
So what does all this mean for the investor still on the sidelines? Well for starters, it reconfirms Microsoft’s sterling reputation for consistent growth that makes it one of the best companies to own this past decade. And with these kinds of numbers and momentum, it’s hard to see them giving up that reputation anytime soon.
January’s rally to date means shares have firmly broken out of the tightening pennant that was forming into the end of last year and which we highlighted in the final week of December. While that may have been an even better buying opportunity than what’s on offer today, investors can’t really go wrong with adding some Microsoft. There’s a 0.96% dividend yield to keep accounts topped up while a price-to-earning ratio of 37 is well below the mid-40s where it spent much of 2017 and 2018.
Things have only gotten better for the company in the years since and they’re coming out of the pandemic stronger than when they went into it. Goldman Sachs recently slapped a fresh target of $285 onto shares, suggesting upside of some 20% from Tuesday’s closing price. They called Microsoft a “top idea” that was "likely to incrementally benefit in 2H:2021 as spending conditions potentially improve and priorities shift back toward the ‘Offense’ category."
Both Citi and Keybanc were also both out recently with upgrades and price target raises in a similar vein to Goldman so while there might be some stocks entering bubble territory, cough Gamestop (NYSE: GME) cough, Microsoft has plain sailing ahead.
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