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Microsoft (NASDAQ: MSFT) released its second-quarter financials for the fiscal year 2022 last Tuesday after the closing bell. Though the stock initially fell by more than 5% in extended trading sessions, it turned positive soon after the company issued its sales forecast for the current year.
Microsoft was able to beat the market’s expectations this earnings season. It reported solid holiday-season earnings and further expects to reach record cloud revenue once again, challenging the $50 billion level in the current quarter as well.
With the ongoing market volatility, investors seem to have almost zero tolerance, even for minor disappointments. The only blemish on the company’s ledger is that Azure’s cloud-services business failed to meet the “whispered” growth rate forecast at 48% by Wall Street.
Key Financial Numbers for Microsoft in Q2
Microsoft’s revenue grew by 20% year-over-year to $51.7 billion, while its net income and diluted earnings per share also increased by 21% and 22%, respectively, reaching the $22.2 billion and $2.48 mark.
Though the company managed to grow its revenues across all segments, its Intelligent Cloud business was a key catalyst and increased by 25.52%, primarily driven by the 46% revenue growth in the Azure and other cloud services areas. However, this 46% growth rate was the lowest Microsoft recorded in the past four quarters.
Besides, amongst its Productivity and Business Processes segment, the search and news advertising area and LinkedIn showed tremendous potential growing by about 32% and 37% year-over-year, respectively.
In addition, the LinkedIn sessions had grown by 22%, this time showcasing record engagement and including more than 20,000 events. As per CEO Satya Nadella, the strong demand for advertising had fueled the growth of both these segments. Lastly, its Personal Computing unit posted a 15% improvement in its revenues to $17.5 billion.
Microsoft’s increased spending in cloud engineering, gaming, LinkedIn, and commercial sales inflated its operating expenses by 14%. For example, investments in the cloud engineering and gaming section saw its research expenditure increase by 18%.
In comparison, the sales and marketing costs increased by 9% following increased investments in commercial sales and the LinkedIn section. However, these investments seem justified as Microsoft has deployed its resources only in areas contributing significantly to its revenue growth.
Moreover, the giant also spent $10.9 billion on stock repurchases and dividend payments in the quarter, which was 9% higher than the year-ago period.
What’s Ahead for MSFT stock investors?
Nadella has a vision for developing a metaverse and feels Microsoft is well-positioned to gain traction in what can potentially be a trillion-dollar market. To achieve its lofty goals, Microsoft recently announced the acquisition of Activision Blizzard (NASDAQ: ATVI) for $68.7 billion, which is the largest deal in the tech sector.
Following the acquisition, Microsoft will now be the third-largest gaming company globally in terms of sales provisioning the tech heavyweight access to several multi-billion-dollar franchises.
Microsoft, being one of the world's largest companies, faces difficulties in maintaining its steep valuation. So, the stock can lose momentum if growth rates decelerate in the upcoming quarters. Alternatively, Microsoft will continue to benefit from secular tailwinds such as the shift towards hybrid work environments in a post-pandemic world, which will drive cloud sales higher.
MSFT stock is currently trading at $309, and Wall Street has a 12-month average price target of $372. It suggests Microsoft is trading at a discount of over 20% right now.
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