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Microsoft share price: Where next following Q3 Results?

We examine the highlights from the company’s third quarter report, released after the market close on Tuesday, April 27.

The Microsoft Corporation (ticker: MSFT) share price fell slightly in after-hours trade following the release of its third quarter report.

This comes even after the tech giant reported robust double-digit growth across the top and bottom-lines and beat on a number of key analyst estimates.

Overall, for the third quarter ending 31 March, the company reported revenues of $41.7 billion, implying a year-on-year growth rate of 19%. Analysts were forecasting Q3 revenues of $41.9 billion.

Commenting on these results, Microsoft CEO, Satya Nadella said:

‘Over a year into the pandemic, digital adoption curves aren’t slowing down. They’re accelerating, and it’s just the beginning.’

‘We are building the cloud for the next decade, expanding our addressable market and innovating across every layer of the tech stack to help our customers be resilient and transform,’ Mr Nadella added.

On the bottom-line, Microsoft reported third quarter GAAP net income of $15.5 billion and diluted earnings per share (EPS) of $2.03. Analysts were forecasting EPS of $1.78.

Microsoft Share Price ↓

Despite beating top and bottom-line Wall Street estimates, the stock was off 2.66% in after-hours trade, trading down to $255 per share. Microsoft has been in consistent ‘rally mode’ in the short-term: In the last 6-months the stock is up 29% and in the last 1-month, 11.36%.

At those price levels, MSFT trades at ~39x earnings, making it more expensive on a relative basis than the likes of Apple (ticker: AAPL), Alphabet (ticker: GOOG) and Facebook (ticker: FB).

Cloud Performance in Focus

Arguably Microsoft’s most important or at the very least most watched business segment, the company's cloud business segment recorded another quarter of stellar growth in Q3.

Total cloud revenues came in at $17.7 billion, implying a year-on-year growth rate of 33% and marking the 5th consecutive quarter of growth for the division. On a more granular level, Intelligent Cloud revenue came in at $15.1 billion in the period, which management noted was driven by a strong Azure revenue growth.

Overall, cloud gross margins remained stable, at 70%, slightly down quarter-over-quarter, but higher than where they were a year ago.

Commenting on the performance of this business segment, Microsoft CFO Amy Hood said:

‘The Microsoft Cloud, with its end-to-end solutions, continues to provide compelling value to our customers generating $17.7 billion in commercial cloud revenue, up 33% year over year.’

Where Next?

Looking forward, management provided the following Q4 guidance:

  • Intelligent Cloud revenues of between $16.2-16.45 billion
  • Productivity and Business Processes revenue of between $13.8-14.05 billion
  • Operating expenses of between $13.1-13.2 billion
  • An effective tax rate of ~16%

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