Microsoft (NASDAQ: MSFT) released a solid set of results last week, proving once again why it is a trillion-dollar company. Then, while analysts were trying to decide whether the results justified further upside for the stock price, the company was unexpectedly awarded the Pentagon’s JEDI cloud computing contract.
In after-hours trading on Friday, the stock traded as high as $145, well above the all-time high of $142.37. This should result in a convincing break of the technical resistance the stock has been battling against since July, with the most likely target at $160.
Robust Growth Across the Board
First-quarter revenue came in at $33.1 billion, up 13% and $860 million higher than analyst consensus. GAAP EPS was $1.38, $0.14 better than expected and 21% up for the year. Importantly, operating income rose 27%, as both the gross and operating margin improved substantially.
Growth from the cloud segment continues to slow, although the revenue breakdown still shows the segment driving growth. Intelligent Cloud grew 27% to $10.85, with Azure growing 59% compared to 64% in the last quarter.
Revenue from the Productivity and Business Processes segment grew 13% to $11.08 billion. Within the segment, Office Commercial and cloud services grew 15%, while Office Consumer grew 6%. The Personal Computing segment only grew 4% but still contributed $11.13 billion to the bottom line. LinkedIn continues to show strong growth, with sales growing 25% for the year.
Going forward Microsoft expects double-digit revenue growth and the operating margin to improve slightly.
Pentagon Contract a Surprise Win
After the market closed on Friday, the U.S. Pentagon announced it was awarding the contract to migrate its systems to the cloud to Microsoft. This was a surprise as Amazon was widely viewed as the favourite.
The contract is worth $10 billion over 10 years and will transform the U.S. military’s systems, many developed during the 1980s and 90s. Dan Ives, an analyst at Wedbush, said the contract could add $10 to Microsoft’s stock price.
Where to Now?
The stock has traded in a tight range since the previous set of results were released in July. Judging by this quarter alone, Microsoft looks cheap, particularly compared to the rest of the sector. However, there are some concerns over the sustainability of the current growth trajectory after such a strong year.
However, the technical picture is very bullish. The Pentagon deal will almost certainly see the stock break resistance at $142 and the next target would be around $160 – which is where most analysts have their target prices. Whether or not the contract justifies a $160 stock price, a breakout will attract momentum traders and it may get there quite quickly.
If there is a bear case to make it is that the market is too bullish. Among sell-side analysts, 33 have buy and outperform ratings, versus just 2 holds and no sells. An industry-wide slowdown would also affect Microsoft, but that would only happen during or after the next earnings season.
Microsoft began the year trading close to $100. A move to $150 or $160 would make for a very good return for the year and would offer a great opportunity to reduce exposure.
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