Microsoft delivered picture-perfect earnings after the bell Thursday, calming the market’s brief fears about runaway spending on AI infrastructure without the cloud revenues to show for it. Revenue increased about 17% year over year, to $61.86 billion, beating the Street consensus estimate of $60.8 billion, according to data from LSEG. Earnings per share (EPS) increased 20% from last year to $2.94, ahead of estimates for $2.82 a share, LSEG data showed. Microsoft Why we own it : Microsoft is a core backbone of global productivity thanks to its Office 365 suite and hybrid cloud platform Azure. The company is also proving itself to be a key provider of artificial intelligence tools due, in part, to its large investment in OpenAI, the startup behind ChatGPT. We also like what it’s doing in the video gaming industry as looks to grow recurring revenue streams. Competitors : Amazon , Alphabet and Salesforce Weight in portfolio : 2.75% Most recent buy : Aug. 21, 2023 Initiated : Dec. 4, 2017 MSFT YTD mountain Microsoft YTD Bottom line You couldn’t ask for much more from Microsoft. The company delivered beats across every single line we focus on. Sure, total revenue for the next quarter was a little mixed. And that always matters. However, momentum from AI services will keep Azure growth stabilized at these high levels, outperforming the market’s expectations. As for the other segments, we wouldn’t sweat it because management has a history of outperforming its guidance. We also remain impressed by the high level of execution. It’s one of the clearest AI beneficiaries in all of tech. We don’t see any issues in management’s ability to balance investments to support its AI leadership while remaining disciplined on costs and margins. The stronger-than-expected quarter and upbeat Azure revenue guide are sending shares up more than 4% in after-hours trading, helping the stock recover all of Wednesday’s losses and then some. The move to about $418 after hours puts MSFT about $11 per share below its all-time high close in March, and it’s reasonable to think it could take out those highs over time. We are raising our price target to $500 from $450 and view pullbacks on broader market volatility from inflation fears as opportunities to add to our position. Quarterly results The quarter was clean with beats across the board. The Intelligent Cloud division posted sales above the high end of guidance with revenue growth of about 21%. As with every quarter, the key line was revenue growth from Azure, Microsoft’s cloud services business. Azure and other cloud services revenues increased 31% year over year on a reported and constant currency basis, accelerating from the prior quarter’s reported rate of 30%, and 28% in constant currency, exceeding investor expectations and guidance of about 28% and change. The 31% growth rate was faster than the 28% Google Cloud grew this quarter, and that came off a smaller base. We’ll see how Amazon fares next week. Once…
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