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Is Microsoft a Buy After Solid Q4 Earnings?

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Microsoft (MSFT - Free Report) stock went through the roof after the company delivered earnings that topped the Zacks Consensus Estimate by 13.2%.

Revenue was strong across important product areas (Azure 64%, LinkedIn 25%, office 365 commercial 31% and Dynamics 365 45%). But Azue remained the strat performer and the business most investors are following closely.

Despite the mix issue within Azure, revenue growth was just somewhat lower than the 70%+ in the preceding three quarters. The flexibility of its offerings that include a mix of IaaS, PaaS and SaaS, as well as key partnerships with providers of other resources, places Microsoft in an enviable position. This, along with its strong position as a legacy provider (customers are already comfortable using its products) is leading to strong renewals and a growing number of customer wins.

Synergy Research’s John Dinsdale, as reported by Techcrunch says that Microsoft has grown its cloud market share in each of the last few years (9% in 2016, 11% in 2017, 14% in 2018 and 16% in the first quarter of 2019). In spite of that, it remains the fastest-growing player in the IaaS space, although Amazon (AMZN - Free Report) is a distant first and Alphabet’s (GOOGL - Free Report) Google is a little bit behind. Others like Oracle (ORCL - Free Report) and IBM (IBM - Free Report) are not in the same league and Alibaba (BABA - Free Report) is strong mainly in China.

Unlikely areas like Surface and net search advertising revenue also increased a respective 14% and 9%. Windows commercial and office commercial were both up in the mid-teens percentage range.

Overall, it was a very strong performance minus gaming and related software, which were down. FX had a negative impact, so all the growth rates were a few points higher in real terms.

The cloud business is a capital intensive one, so there is usually some operating leverage. The expanding margins at Azure are likely linked to that.

It also promised double-digit revenue and operating margin growth in fiscal 2020.

Through Nadella’s tenure during which Microsoft went from being a PC-centric business to a cloud-centric one, execution has been super. As the market has been focused on regulatory hassles at once red-hot tech stocks like mainly Facebook (FB - Free Report) , but also Google, Apple (AAPL - Free Report) and Amazon, Microsoft has simply been delivering results, quarter after quarter.  

And the results are there for all to see.

Now the question is, is this a good time to buy the stock? Especially considering that it has already appreciated after the strong results?

This is a tricky question as far as Microsoft is concerned. On the one hand, it is trading well above its median value having appreciated 36.0% year to date (which is not a good time to buy a stock usually, and especially considering Microsoft’s size).

On the other hand, it’s probably time we went back to re-evaluating our models because there doesn’t seem to be an end in sight for Microsoft’s cloud business and its productivity-centric cash cow continues to do the job. So this may be a trillion dollar company headed for new heights. The rest is just not making sense.

Microsoft shares carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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