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Tech giant Microsoft (NASDAQ: MSFT) reported its fiscal third quarter of 2022 (ended in March) results yesterday after market hours. In Q3, Microsoft’s sales stood at $49.36 billion, with adjusted earnings of $2.22 per share. Comparatively, analysts forecast revenue of $49.03 billion and adjusted earnings of $2.18 per share in Q3. In the year-ago period, Microsoft reported revenue of $41.7 billion and earnings of $2.03 per share.
Due to its revenue and earnings beat, MSFT stock is trading 4.6% higher in pre-market today, valuing the company at $2.1 trillion, by market cap. Due to the ongoing sell-off surrounding growth stocks, Microsoft is trading 21% below record highs. However, MSFT stock has still returned 327% to investors in the last five years and 935% in the last 10 years.
Let’s see what drove Microsoft revenue in Q3 and if the stock should be part of your portfolio today.
Microsoft cloud sales rose 32% in Q3
According to Microsoft CEO, Satya Nadella, digital technology will be a key driver that will power global economic output. So, the company is focused on expanding its opportunity across the tech stack as it aims to widen its portfolio of products and services.
In fiscal Q3 of 2022, customer commitments to Microsoft’s cloud platform coupled with strong sales execution drove commercial bookings growth at 28%. Comparatively, Microsoft’s cloud sales rose 32% year over year to $23.3 billion.
Further, LinkedIn sales grew by 34% while intelligent cloud revenue stood at $19.1 billion in Q3. In an interview with Bloomberg, the tech heavyweight confirmed hardware sales for Xbox surged by 14% which was better than initial estimates. The Xbox is gaining market share as it continues to disrupt the cloud gaming vertical.
In fiscal Q4 of 2022, Microsoft’s productivity and business process revenue is forecast between $16.65 billion and $16.9 billion. While Office 365 sales might decline on a sequential basis, it will be offset by personal computing revenue which is forecast between $14.65 billion and $14.95 billion in Q4.
Additionally, intelligent cloud sales are forecast between $21.1 billion and $21.35 billion in Q3 with operating expenses estimated between $14.8 billion and $14.9 billion. Due to low engagement hours and supply chain constraints, Microsoft expects gaming sales to decelerate in the near term.
Microsoft also confirmed the ongoing war between Russia and Ukraine is expected to lower sales by $110 million in Q4. The lockdown measures imposed in China resulting in production shutdowns will also impact the top-line going forward.
What next for MSFT stock and investors?
Microsoft is a money-generating machine as it has successfully built a software business allowing the company to generate cash flows across business cycles. Its suite of solutions includes Microsoft Office as well as Dynamics which is used for enterprise resource planning. These products are all the more powerful when tied to cloud offerings and business intelligence tools.
Microsoft is well poised to benefit from multiple wide-moat franchises that generate high margins. Additionally, the IT spending on cloud workloads is estimated between 5% and 10% providing Microsoft Azure with enough room to grow in the upcoming decade.
Microsoft has a well-diversified business that includes a social media platform in LinkedIn and a video game platform in Xbox. It also announced the acquisition of Activision Blizzard (NASDAQ: ATVI), one of the largest gaming companies in the world, for $69 billion.
In a nutshell, Microsoft is a top long-term bet given its robust financials, wide economic moat, strong growth in its cloud business, billion-dollar acquisitions, and more. Analysts tracking MSFT stock expect it to gain another 35% in the next 12-months.