Based on its strong stock price jump since sharing its fiscal 2016 Q1 earnings results on Oct. 22, Microsoft (MSFT 1.65%) is finally rewarding longtime shareholders for their patience. With the stock up 13% since beating analyst expectations for both revenue and earnings per share, it's safe to say most investors and industry pundits liked what they heard. Combined with its solid 2.65% dividend yield, Microsoft stock offered a world of opportunity heading into fiscal 2016 Q1.
So is there any more room to run for investors who hadn't jumped onboard Microsoft CEO Satya Nadella's "mobile-first, cloud-first" train? The answer lies in how Microsoft delivered on Nadella's key initiatives, and based on that, all signs point to "yes."
Just the facts
On a GAAP basis, including one-time items, Microsoft's $20.4 billion in sales last quarter was a 12% decline compared with last year, though it did slightly exceed analyst expectations. On the EPS front, Microsoft really nailed it last quarter by reporting a 6% improvement in EPS, to $0.57. Last quarter's revenue looks better after removing the impact of deferring nearly $1.3 billion in Windows 10 sales, declining just 7% year over year.
Somewhat surprisingly given Microsoft's strong results of late was the drop in Surface revenue in Q1, from last year's $908 million to $672 million. Of course, with the new Surface Book on the way and the expansion of its re-seller base from about 150 to more than 4,500 sales folks, sluggish Surface results will probably take a turn for the better over the holiday season.
Microsoft's Windows revenue once again declined last quarter. Nadella did point out that the drop in what was Microsoft's former bread-and-butter product was only 6%, which was "better than the overall PC market" thanks to the wildly successful introduction of Windows 10. Slowing quarterly phone revenue has also been a consistent theme, which continued in Q1. So why would lower total revenue and device sales drive Microsoft's stock price up more than double digits in a week?
How'd they do that?
A primary reason Microsoft stock jumped was the continued growth of its cloud sales. The whopping $5.9 billion of "intelligent cloud" revenue in Q1 was an 8% improvement year over year, and Microsoft now boasts an annual run rate of over $8.2 billion. To put that into perspective, fellow tech behemoth IBM (IBM 0.16%) is also committed to the fast-growing cloud market, and its $4.5 billion annual run rate is nothing to sneeze at, but it pales in comparison with Microsoft's results.
One reason for Microsoft's strong cloud sales, which puts it directly in IBM's big data wheelhouse, is an emphasis on growing cloud-based analytics. In a market that's expected to reach as much as $125 billion this year, there's a lot at stake in winning the data-analytics wars. Considering that much of the big data amassed in today's digital world is hosted in the cloud, the two high-growth markets go hand in hand.
And there's more
As impressive as Microsoft's cloud results were, it was hardly the only upside last quarter. With over 110 million devices already running Windows 10, Microsoft has taken a big step toward reaching its goal of 1 billion users. Better still, the early success of Windows 10 drove strong results across other key areas, including mobile. Last quarter saw over 200 million downloads of Office 365 to mobile devices, which speaks directly to Nadella's mobile strategy: Get Microsoft products and services into the hands of as many users as possible, regardless of device or operating system.
Microsoft's mobile efforts also helped its Bing search engine to show a profit in Q1, thanks to a 29% increase in ad sales, excluding the impact of currency. For much the same reason, Microsoft's Dynamics CRM revenue jumped again last quarter, up 12%, and there are three times as many online users compared with last year.
When it's said and done, Microsoft hit home runs where it counted -- mobile and cloud-related sales -- and it appears that momentum will continue. Add it all up, and investors in search of a solid growth and income alternative should still have Microsoft at, or near, the top of their buy list.
