Microsoft Posts Strong Results in Cloud Computing, but High Valuation Weighs on Stock Dynamics

Microsoft (MSFT) shares were down about 5% immediately after the company’s financial results’ announcement, but today in premarket they are bouncing back almost 4% at the time of writing. What factors contributed to such a wild intraday volatility?

The high-tech mogul’s fiscal Q2, which ended Dec. 31 2021, was driven by strength in the company’s PC business, but investors seem to have been somewhat disappointed by performance in the company’s enterprise software segments, which only matched Wall Street estimates.

Here’s what was the most eye-catching cross the published data:

Washington-based Microsoft (MSFT) said its earnings per share rose to $2.48 on $51.7 billion in revenue, up 20% YoY. Revenue from cloud computing, largely driven by Azure, rose 32% YoY to $22.1 billion, while the consensus expected Microsoft to earn $2.32 per share on $50.78 billion in revenue, up 17.9% YoY.

Azure, Microsoft’s official multifunctional cloud platform, which has been a focal point for investors, saw revenue surge by 46% YoY, though Microsoft did not break it down in dollar terms. Microsoft's revenue from Productivity and Business Processes was $15.9 billion, up 19% YoY, aided by Office 365, which now has 56.4 million subscribers and counting. Revenue from Intelligent Cloud was $18.3 billion, up 26% YoY, while More Personal Computing, which includes Windows, rose 15% year-over-year to $17.5 billion.

We think Azure and Office 365 will remain Microsoft’s cornerstone areas of further rapid growth, although the latter faces increasing competition from Google Mobile Office. At EV/EBITDA of around 20x, P/E of 30x and P/S of 11x, MSFT looks fully valued, and further stock appreciation largely depends on the general state of the equity market, most importantly, quite a volatile sentiment towards hi-tech sector, as well as any prospective government contracts. As we remember, the Joint Business Defense Infrastructure project (JEDI) was awarded to Bill Gate’s company during the Trump Administration and has been canceled in July 2021 to be tendered for new players such as Amazon Web Services and other Big Five cloud companies.