Microsoft: What We Think of the Stock After Earnings

Key Morningstar Metrics for Microsoft

• Fair Value Estimate
  : USD 600
• Morningstar Rating
  : ★★★★★
• Morningstar Economic Moat Rating
  : Wide
• Morningstar Uncertainty Rating
  : Medium

What We Thought of Microsoft’s Earnings

Microsoft’s MSFT fourth-quarter results topped the high end of guidance on key items. Revenue increased 17% year over year in constant currency to USD 90.0 billion, versus the high end of guidance of USD 87.8 billion, while operating margin was 45.1%, compared with the high end of guidance implied at 44.7%.

Why it matters: Results are good overall, as Azure growth and all three segments beat the high end of guidance. Further, the outlook is slightly ahead of our model for the first quarter. Critically, we see strength in Azure, in both traditional and artificial intelligence workloads, which is pulling along other AI solutions.

• Near-term demand indicators remain robust. Commercial bookings grew 18% year over year in constant currency, excluding OpenAI, and grew 11%, including OpenAI. Remaining performance obligation was up 84% to USD 678 billion, about 30% of which will be recognized in the next 12 months.
• Demand for Azure AI services is surging, which is a clear long-term positive. While Azure remains capacity-constrained, both traditional and AI workloads were strong. Azure growth was 43% in constant currency for the quarter, surpassing guidance of 39.5%, while capital expenditure grew 110%.

The bottom line: We keep our fair value estimate for wide-moat Microsoft at USD 600 per share, while raising our growth forecast and offsetting it with a margin decrease due to higher Azure capital expenditure. The stock remains one of our top picks.

Coming up: First-quarter guidance is slightly ahead of both FactSet consensus and our own estimates, and includes USD 90.4 billion in revenue, 48.5% implied operating margin, and USD 4.70 in implied EPS at the midpoints. Capital expenditure is guided to USD 50 billion.

Big picture: Results are consistent with our long-term thesis, which centers on the expansion of hybrid cloud environments, the proliferation of AI, and Azure. We center our growth estimates mainly around Azure, Microsoft 365 Copilot traction, and uptake of other AI solutions.