Key points to remember
- EPS was $2.03 versus analysts’ expectation of $1.63.
- Revenue exceeded analysts’ expectations.
- Azure cloud revenue grew faster than analysts had estimated.
- Intelligent Cloud, led by Azure, drove revenue growth.
What happened
Microsoft reported EPS for the second quarter of fiscal 2021 that beat analysts’ estimates. Revenue also beat expectations, growing at a healthy pace from the same three-month period a year ago. Azure cloud revenue grew at a faster rate than analysts expected, up 50% from the prior year quarter.
CEO Satya Nadella pointed to Microsoft’s cloud platform as a key part of the digital transformation many businesses are undergoing amid the COVID-19 pandemic. “Creating their own digital capability is the new currency that drives resilience and growth in every organization. Microsoft is accelerating this change with the world’s largest and most comprehensive cloud platform,” he said.
(Below is the original Earnings Snapshot from Investopedia, published January 21, 2021.)
What to look for
Microsoft Corp. (MSFT), one of the market leaders in cloud services, is betting big on autonomous driving. The tech giant is one of many companies to invest more than $2 billion in Cruise, a driverless car startup owned by General Motors Co. (GM). Microsoft’s goal is to provide services to the startup through its fast-growing Azure cloud platform, which is bolstering the company’s sales amid the COVID-19 pandemic.
Investors will focus on how Microsoft continues to weather the financial impact of the pandemic when the company reports its results on January 26, 2021 for the second quarter of fiscal 2021. Microsoft’s fiscal year (AF) ends in June.Analysts expect adjusted earnings per share (PES) and incomes are growing, but at a significantly slower pace than in recent years.
Investors will be watching closely for revenue growth from Azure, an increasingly important driver of Microsoft’s overall earnings and revenue growth. Analysts expect Azure revenue to grow at a rapid, albeit decelerating, rate.
Microsoft shares have outperformed the broader market over the past year. The performance gap has widened since the pandemic-induced stock market crash that occurred between late February and late March 2020. However, this gap has been slowly narrowing since last summer. Microsoft shares have provided a total return of 36.1% over the past 12 months, more than double the S&P 500 total return of 16.0%.
Source: Trading View.
Microsoft’s stock briefly fell after the report results for the first quarter of fiscal 2021 even though adjusted EPS and revenue exceeded analysts’ estimates. Adjusted EPS increased 31.4% as revenue increased 12.4% from the prior year quarter. This is the slowest pace of revenue growth since the fourth quarter of fiscal 2019.The stock quickly rebounded within a week.
Investors reacted similarly to Microsoft’s fourth-quarter fiscal 2020 financial results, selling the stock on the news before bidding on its price the following week. Adjusted EPS rose 6.6%, its slowest pace in at least eight quarters. Revenue increased by 12.8%, marking a deceleration from the growth recorded in the previous three quarters.
Analysts expect earnings and revenue to continue to grow in the second quarter of fiscal 2021, but at much slower rates compared to recent years. Adjusted EPS is expected to rise 7.9%, the second slowest pace in at least ten quarters. Revenue is expected to grow 8.8%, marking the slowest pace in at least ten quarters.These estimates indicate that Azure’s strong growth has not been able to offset the significantly slower growth of Microsoft’s other key businesses.
| Microsoft key indicators | |||
|---|---|---|---|
| Estimate for the second quarter of fiscal 2021 | Q2 2020 | Q2 2019 | |
| Adjusted earnings per share ($) | 1.63 | 1.51 | 1.10 |
| Revenue ($B) | 40.2 | 36.9 | 32.5 |
| Azure revenue growth (%) | 41.4 | 62.0 | 76.5 |
Source: visible alpha
As mentioned above, investors will also focus on Azure’s revenue growth. Azure is Microsoft’s cloud platform, which includes more than 200 cloud products and services. cloud computing refers to the provision of a variety of services through the Internet, including data storage, servers, databases, networking, and software. The rise of the remote work economy amid pandemic-related lockdowns has underscored the growing importance of cloud services. Microsoft and other cloud providers have tried to increase their market share by partnering with small startupsproviding them with the cloud platform from which to launch their own products and services.Microsoft’s investment in Cruise is just one example.
Azure’s revenue grew at a much faster rate than Microsoft’s overall revenue. However, the pace of cloud service has slowed significantly over the past few years as Azure has grown from a young service with a small revenue base to a much larger enterprise. Revenue increased by 48.0% in the first quarter of fiscal 2021. The average rate for the four quarters of fiscal 2020 was 56.6%. In fiscal 2019, the average rate of growth was 73.2%. Analysts expect Azure revenue to grow 41.4% to $6.9 billion in the second quarter of fiscal 2021, continuing the decelerating trend. Despite this trend, the growth is still impressive. If analysts are correct in their predictions, Azure will be more than 3.5 times larger than it was nearly two years ago.
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