Microsoft Surprises The Street With Good Earnings

By Jonathan Berr | October 25, 2013 AAA

Microsoft (Nasdaq:MSFT) has been out of fashion on Wall Street for a long time, which makes its better-than-expected quarterly earnings report issued yesterday especially shocking,

The Redmond, Wash. company earned $5.24 billion, or 62 cents per share, on revenue of $18.5 billion, well ahead of the 54 cent profit and $17.8 billion in sales analysts had expected. Not surprisingly, shares of the software giant traded up on the news and continued to surge today, gaining 6.7% to $35.97.

Though IBM (NYSE:IBM) and Oracle (Nasdaq:ORCL) both reported disappointing results because of lackluster spending by large corporate customers, Microsoft’s business with large enterprises is booming. Revenue from commercial cloud computing, where companies run software on remote servers, more than doubled in the quarter. Demand was also strong for Office 365, Azure, and Dynamics CRM Online, the company said. Moreover, the PC business, whose decline has hobbled Microsoft for years, performed better than Microsoft expected. The company also has high hopes for its upcoming release of its latest Xbox gaming console and its newest Surface tablets.

“… we are executing better, getting our customers what they want and making meaningful progress through the early stages of our transformation,” Chief Financial Officer Amy Hood said on the earnings conference call.

As for Microsoft’s stock, even with the recent run-up, it remains too cheap for investors to ignore. The stock trades at a price-to-earnings multiple of about 13, which is under its average five-year high, according to Reuters. Wall Street firms are ratcheting up their price targets on the software giant. Nomura’s is now at $40 and Jefferies is at $42, which implies an 18% upside from current prices.

Of course, one quarter does not make a trend. Investors have gotten burned before waiting for a Microsoft turnaround and some pundits remain skeptical that better times lie ahead. Analysts at Goldman Sachs noted that while the company’s quarterly performance was good that it will take years for the company to transform. They reiterated a “sell” rating on the stock.

Indeed, there are many questions yet to be answered about Microsoft including who will replace CEO Steve Ballmer when he “retires” at the end of the year. Moreover, some investors disapprove Microsoft’s planned $7.2 billion acquisition of Nokia’s device and services business and others are trying to oust co-founder Bill Gates from the company’s board of directors. Some pundits have advocated that the company split itself up, saying it is too unwieldy to manage.

The Bottom Line

Microsoft, which has a market capitalization of nearly $300 billion, isn’t withering away anytime soon. The company should post solid numbers in the current quarter as well with revenue growth expected to top 7%. While that’s hardly the double-digit growth that tech investors see in high-flying tech stocks, it proves that it is possible to teach an old dog new tricks. The time to buy Microsoft is now because if it becomes “fashionable” to like the company again, its share price will surely soar.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article. Jonathan Berr does freelance writing for MSN, which is owned by Microsoft.

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