Key Takeaways

  • Adjusted EPS was $1.82 vs the $1.55 analysts expected.
  • Revenue growth beat expectations.
  • Intelligent Cloud segment revenue grew 20%, also more than expected.

What Happened

Microsoft beat analysts' expectations on both earnings and revenue. While all three of its segments saw revenue growth, the largest growth came from its Intelligent Cloud segment, which grew 20% year-over-year, also beating analysts' expectations. Revenue from Microsoft's cloud computing platform, Azure, was a major driver of the segment's performance, having grown 48% year-over-year.

(Below is Investopedia's original earnings preview, published October 21, 2020.)

What to Look For

Microsoft Corp. (MSFT) stock has performed well in 2020, rising about 35% YTD and dramatically outpacing the market overall. With millions of customers working remote from home amid the COVID-19 pandemic, Microsoft has continued to see strong demand for key products and services, such as the company's Azure cloud computing business.

Investors will watch how well Microsoft is continuing to weather the pandemic-induced economic slowdown when it reports earnings for Q1 FY 2021 on October 27 after the market close.  Analysts expect growth in adjusted earnings per share (EPS) and revenue to rise, but at a significantly slower pace year-over-year (YOY).

Investors also will focus especially closely on a key metric: the company's fast-growing Intelligent Cloud business. Microsoft's cloud computing business has seen tremendous growth in the past several years, nearly doubling its quarterly sales since 2017. For Q1 FY 2021, analysts expect Intelligent Cloud revenue to post strong gains, but dramatically slower than the same period a year go.

Microsoft stock fell early in 2020 with the overall market, but the company has more than offset those declines with a strong performance in recent months. In the last year, Microsoft has posted a total return of 57.8%, nearly four times the 15.1% gain in the S&P 500.

One Year Total Return for S&P 500 and Microsoft
Source: TradingView.

Microsoft has posted 14 consecutive quarters of YOY adjusted EPS growth since Q3 FY 2017. The most recent quarter, Q4 FY 2020, marked YOY adjusted EPS growth of just 6.6%, the lowest figure in two years. For Q1 FY 2021, analysts predict YOY adjusted EPS growth of 11.8%, higher than Q4 but a slowdown relative to many other recent quarters.

The company's revenue growth has been even more consistent over the past 12 quarters. During this period, each quarter has logged YOY revenue growth between 11.9% and 18.5%. Consensus estimates for Q1 FY 2021 also indicate a slowdown in YOY revenue growth, predicting 8.0% growth for the quarter.

Microsoft Key Metrics
  Estimate for Q1 FY 2021 Actual for Q1 FY 2020 Actual for Q1 FY 2019
Adjusted Earnings Per Share ($) 1.55 1.38 1.14
Revenue ($B) 35.7 33.1 29.1
Intelligent Cloud Revenue ($B) 12.7 10.8 8.6

Source: Visible Alpha

Microsoft's Intelligent Cloud segment is a barometer of the company's overall performance. Across the tech industry, cloud computing services represent one of the fastest growing areas. With the growth of Microsoft's cloud business slowing in the most recent quarter, investors will watch carefully to gauge how well the company has succeeded while facing stiff competition from rival Amazon Inc.'s (AMZN) Amazon Web Services (AWS). Microsoft's Azure is ranked second to AWS in the cloud market. 

Microsoft's Intelligent Cloud segment has grown for at least 14 consecutive quarters. The pace of growth is steady and significant, such that quarterly revenue doubled from $6.7 billion in Q3 FY 2017 to $13.4 billion in Q4 FY 2020. While analysts predict solid YOY growth of 17.4% for Q1 FY 2021, this would represent a slowdown from 26.6% in Q1 FY 2020 and 23.8% in Q1 FY 2019.