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Strong Earnings Not Enough for Microsoft Shares

29 October 2020 By Mircea Vasiu

Microsoft delivered its Q1 2021 fiscal year results this week, and they were nothing short of impressive. 

The company reported 11% growth for its productivity and business processes unit, 20% growth for its intelligent cloud business and 6% growth on the more personal computing side of the business. All in all, net income, or the bottom line, grew 30% with a 15% rise in gross margin and a 12% rise in revenue.

Put simply – these are stellar results. Yet, the company’s shares declined in line with the general stock market route. The stock market in the United States turned negative this week as the second round of stimulus did not come, as the second round of coronavirus infections arrived.

Highlights of the Microsoft Q1 2021 Earnings

Investors cannot argue that Microsoft did not deliver. The only thing one can say about the company’s share price reaction is that the earnings were released at a bad timing.

Cash flow from operations, one of the most important metrics in financial statements, is up 40% Y-o-Y.
As such, free cash flow reached $14.4 billion, up 38%.

On productivity and business processes, Microsoft includes Office commercial products, Office consumer products, LinkedIn and other dynamic products and cloud services. They all grew by 9%, 13%, 16%, and 19% respectively. Out of the four, LinkedIn growth surprises the most as it comes in the context of economies that struggle with the new reality of remote working and rising unemployment.

Server products and cloud services grew at an astonishing rate of 22%. Once again, Microsoft Azure outperformed, growing by 48%. The Microsoft Azure cloud came as a response to Amazon’s AWS, and since its launch, it proved to be the cash cow for Microsoft. Xbox content and services revenue increased by 30% too.

All in all, Microsoft delivered stellar results for its first quarter in the fiscal year, being one of the technology companies that benefited the most from the lockdowns and the change in consumer behaviour generated by the pandemic. Remote work forced households to build a small home office, which implies that there was the acquisition of software and hardware.

Additionally, the more time people spend at home, the more Internet and gaming products are consumed. As such, Microsoft remains very well positioned to take advantage of these changes.

Unfortunately, the share price declined with the general market. But at the first bounce, Microsoft looks poised to be an outlier from the rest of the market.