Microsoft Delivers, And Is Likely To Continue To Do So

| About: Microsoft Corporation (MSFT)

"Price is what you pay. Value is what you get." - Warren Buffett

The market is showing investors early in 2014 that the New Year is likely to be a much different affair than the just completed twelve months where equities staged a ~30% rally. The market is looking like it will give investors their worst week as far as performance since June 2012.

One company bucking this trend is Microsoft (NASDAQ:MSFT) which delivered its best quarterly results in years after the bell Thursday. It is hard not to get effusive in praising Microsoft's just completed quarter.

Earnings Highlights:

  • Earnings came in at 78 cents a share, a huge beat over the 68 cents a share consensus.
  • Revenues came in at $24.5B, $850mm above estimates. Overall revenue growth clocked in impressively at over 14% Y/Y.
  • This impressive revenue growth was led by Microsoft's two "cloud" businesses (Azure and Office 365). Both products increased sales by more than 100% Y/Y and Microsoft 365 now has 3.5mm subscribers, up from just 2mm in the prior quarter. Both product lines are now over $1B businesses in annual revenues and growing fast.
  • Windows license revenue and server software grew 12% over the prior year.
  • Hyper-V, Microsoft's server visualization product, also took an impressive 5% of market share in the segment from market leader VMware (NYSE:VMW).
  • Even Xbox sales doubled over the previous quarter and Microsoft Surface showed impressive growth as well, albeit in the least important product lines for Microsoft as far as profitably goes.

Why Microsoft is likely to continue to outperform the market:

Analyst Upgrades:

The trading day is not over yet but already analysts are chiming in on Microsoft's tremendous quarter - look for this to continue throughout next week. Credit Suisse raised its price target to $42.50 a share and maintained its "Outperform" rating on the stock. Ross Macmillan (a five-star rated analyst according to TipRanks) at Jefferies reiterated his "Buy" rating and $42 a share price target on MSFT after earnings.

Comparative Valuation:

The shares sell for just ~12.5x forward earnings, ~20% lower than the overall market. Revenue growth is projected to be in the 6% to 8% annual range (and this may end up being revised up after this report) over the next two years. Revenue growth in the S&P 500 is only expected to post ~4% gains in 2014.

Flight to Quality:

Turmoil in the emerging markets this week is causing a "flight to quality." This can be seen in the decline of 10-year treasury yields this week. Microsoft should benefit if this continues. Where else better to "flee" than to a company with a better credit rating (AAA) than the U.S. Government, a yield higher than U.S. 10 year treasuries (3.1%) and 25% of its net market capitalization in net cash and market securities? BUY

Disclosure: I am long MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.