Written by Norman Isaac Mwambazi

Microsoft easily beats Wall Street expectations with strong cloud performance

Tech giant Microsoft (ticker: MSFT) released its earnings report of its first quarter of the 2022 fiscal year (Q1 FY2022) …

Tech giant Microsoft (ticker: MSFT) released its earnings report of its first quarter of the 2022 fiscal year (Q1 FY2022) yesterday, Tuesday, October 26, 2021, after the closing bell and as expected, the company beat Wall Street expectations.

Microsoft has its cloud computing business segment to thank for its stellar performance in the first quarter, as its report shows that the company earned the most revenue from this segment in Q1 FY2022. Revenue from Microsoft Azure, the company cloud computing suite, rose 36% year over year.

In total, the report also shows that Microsoft earned $45.3 in revenue in Q1 FY2022 between July and September 30, 2021, beating Wall Street expectation of $43.93. This translates into an Earnings Per Share (EPS) of $2.71, exceeding analysts’ projection of $2.07 for the quarter.

According to Bloomberg, Wall Street analysts expected Microsoft to earn $16.58 billion from its cloud computing business segment, but it smashed this expectation when it earned $16.98 from Microsoft Azure.

The company’s other segment code-named “Productivity and Business Processes”, includes products like Office, Office 365 Security, Skype for Business, Exchange, SharePoint, Microsoft Teams, and Compliance, brought in $15.04 billion, compared with $14.70 billion analysts were expecting for the quarter.

The report also showed that Microsoft’s personal computing segment, which includes products like Windows operating system, Surface range of personal computers, PC accessories, Xbox game consoles, accessories, game licensing, among many others, brought in $13.31 billion in Q1 FY2022 compared with $12.68 billion that Wall Street analysts expected. 

The computer chip shortage that has hit a range of sectors from automakers to technology also affected Microsoft’s gaming segment as demand for the company’s Xbox Series X and Series S videogame consoles has tremendously overwhelmed supply. This has forced consumers to hunt for gaming systems on the secondary market, where they buy them at almost half the official company asking price. In Q1 FY2022, Microsoft’s revenue from gaming grew by just 2%.

Speaking at the earnings call that was held at the company’s headquarters in Redmond, Washington, United States, Chief Executive Officer (CEO) Satya Nadella noted that digital technology is a deflationary force in an inflationary economy, and this was a reference to the company’s cloud computing services that “deliver the end-to-end platforms and tools organizations need to navigate this time of transition and change.” It should be noted that since the outbreak of the COVID-19 pandemic, Microsoft’s cloud computing suite has registered tremendous growth as businesses, enterprises, schools, and government departments shifted their work and business activities from the physical office to the cloud so that they could keep working remotely. 

Over the years, Microsoft’s cloud computing segment has grown steadily from being a “by-the-way” product in 2008 to now being the most important business segment for the company going into 2022. The company’s growth into a $2 trillion-dollar company has been attributed to the excellent performance of its cloud computing business and other products that consumers feel they can’t do without.

Early this month, Microsoft started rolling out its latest version of its ever-so-popular operating system, Windows 11. The company had announced the software’s release in August, and Windows 11 and its accompanying hardware started rolling out worldwide on October 5, 2021.

Just like chip shortages hit Xbox game consoles, the same happened to Microsoft’s computer sales, as well as limiting their availability, even though demand for desktop PCs has not been affected, according to research firm Gartner Inc. Microsoft designs, manufactures, markets and sells its own personal computer range called Microsoft Surface that has models such as Surface Pro 8, Surface Pro X, Surface Go 3, Surface Laptop Studio, Surface Go 2, Surface Laptop 4, Surface Laptop Go, among many others.

However, this did not bar the tech giant from beating analysts’ expectations in this personal computer segment, as it reported a 10% growth in revenue from Windows OEM in Q1 FY2022.

Mikako Kitagawa, the Research Director at Gartner, noted that the global rollout of the COVID-19 vaccines had shifted consumer behaviour from spending much on electronics to spending more on leisure activities like dining out and travel as countries open up travel to vaccinated tourists.

According to data from Gartner, 84.1 million PC units were shipped in the third quarter of 2021 that ended on September 30. This represents a 1% increase from the amount that was shipped in the same quarter in 2020.

 “As COVID-19 vaccines become more widely available, consumer and educational spending began to shift away from PCs to other priorities, slowing momentum in the market,” Kitagawa said in a press statement.

After releasing the earnings report, Microsoft’s shares stayed flat. The stock has had a good year in the markets, gaining 48.04% year to date, more than double the S&P 500’s growth of 23.54% in the same period.

Today alone, the stock has gained 4.02% to trade at $322.57 a share, with a market capitalization of $2.42 trillion. In the previous quarters of FY2021, Microsoft has enjoyed favourable reviews, with consensus Wall Street analysts giving it “Buy” or equivalent ratings. Many analysts have revised their price target for the stock to as high as $400 in the next 12 months.