Microsoft stock jumps after ‘shockingly robust’ forecast calls for continued strong cloud growth

Analysts on average expected earnings of $2.29 a share on revenue of $52.38 billion, estimates that have come down since Microsoft reduced its forecast last month as a result of the strengthening dollar. Yet conditions have deteriorated even more since that warning.

“In the fourth quarter of fiscal-year 2022, evolving macroeconomic conditions and other unforeseen items had an impact on financial results beyond what was included in our forward-looking guidance,” Microsoft executives stated in their announcement.

Microsoft shares fell nearly 3% in after-hours trading immediately following the release of the results, but jumped to gains of more than 6% after executives shared their forecast, which showed continued strong growth for Microsoft’s cloud-computing offering and maintained full-year revenue and margin expectations.

Chief Financial Officer Amy Hood guided for fiscal first-quarter revenue of $49.25 billion to $50.25 billion, while analysts on average had been expecting $51.44 billion. While the guidance came in lower than expectations for the software and personal-computers segments, cloud revenue is expected to stay strong.

Hood projected revenue of $20.3 billion to $20.6 billion for Microsoft’s cloud segment, while analysts were expecting $20.58 billion, and guided for Azure growth of 43% at constant currency, which should calm some concerns about slowing cloud growth. Hood projected $13 billion to $13.4 billion for the PC segment, against expectations of $13.81 billion; and $15.95 billion to $16.25 billion for Microsoft’s software business, while analysts expected $16.91 billion.

For the full fiscal year, Hood maintained expectations for double-digit percentage growth in revenue and operating margins for Microsoft, both in constant currency and in U.S. dollars. Analysts had expected Microsoft could weaken that guidance to only promising the gains in constant currency.

Wedbush analyst Daniel Ives said in an email conversation with MarketWatch that it was “Rock of Gibraltar guidance.”

“Shockingly robust and speaks volumes about cloud demand holding up” despite the deteriorating economic conditions, Ives said.

Microsoft has not had to deal with doubts in recent years, as the growth of its Azure cloud-computing product, a boom in personal-computer sales and increased usage of software as more white-collar employees worked from home have boosted the company during the COVID-19 pandemic. Microsoft’s fiscal year wrapped up with revenue increasing 18% to $198.27 billion and profit jumping 18.7% to $72.74 billion.

Many of those catalysts appear to be waning, however. The PC boom is over, with firms reporting the biggest year-over-year decline in shipments of the devices in years, and there are concerns about cloud growth as well. Microsoft has sent some signals that it is cutting back in the face of the uncertainty, closing down some open jobs and making select cuts in its workforce.

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“Heading into the quarter, investors are understandably concerned with multiple crosscurrents potentially impacting Microsoft’s results and outlook into FY23: PC shipment declines pressuring Windows OEM results, FX headwinds, a weakening consumer and overall macro weaknesses all serve as potential risks,” Morgan Stanley analysts wrote in a preview of the report last week.

Microsoft’s segment results showed a larger-than-expected slowdown for both cloud and PCs. The “Intelligent Cloud” segment grew to revenue of $20.91 billion from $17.38 billion a year ago, missing the average FactSet analyst estimate of $21.09 billion. The company said that Azure revenue grew 40%, 46% in constant currency, after analysts on average predicted a 43% standard growth rate and Microsoft guided for a constant-currency growth rate of roughly 47%. Microsoft does not provide full financial information on Azure, despite its major rivals — Amazon.com Inc.’s
AMZN,
-5.23%
Amazon Web Services and Alphabet Inc.’s
GOOGL,
-2.32%
GOOG,
-2.56%
Google Cloud — breaking out revenue and profit margins for their products.

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Microsoft’s PC segment, dubbed “More Personal Computing,” collected $14.36 billion in revenue, up from $14.09 billion a year ago and missing analysts’ average forecast of $14.63 billion, according to FactSet. Software revenue, collected in a segment called “Productivity and Business Processes,” rose to $16.6 billion from $14.69 billion a year ago, while analysts on average were expecting $16.64 billion.

Microsoft’s stock has declined 25.6% so far this year, as the S&P 500 index
SPX,
-1.15%
has dropped 16.6% and the Dow Jones Industrial Average
DJIA,
-0.71%
— which counts Microsoft as a component — has decreased 12%. The decline has pushed Microsoft’s market cap lower than $2 trillion, leaving only Apple Inc.
AAPL,
-0.88%
above that mark.