Microsoft’s ‘multiple’ in question as ‘cloud’ shows signs of weakness

on Oct 26, 2022
  • Microsoft's cloud revenue fell shy of Street estimates in Q1.
  • Joe Terranova and Brent Thill shared their outlook on MSFT.
  • Microsoft stock is now down 30% versus the start of 2022.

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Microsoft Corporation (NASDAQ: MSFT) reported better-than-expected results for its fiscal first quarter on Tuesday. Shares are still down about 6.0% after the bell.

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Investors are responding to the weakness in the cloud business.

“Intelligent Cloud” brought in $20.3 billion this quarter – up 20% from a year ago. Experts, though, had forecast a slightly higher $20.4 billion in cloud revenue. A 35% annualised growth in “Azure” also came in a bit shy of the Street estimates, as per the earnings press release.

Pro shares his outlook on the Microsoft stock

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Remember that “cloud” is what wins Microsoft a premium multiple. And so, a hint of weakness there raises the question of “valuation”. Still, Joe Terranova (Virtus Investment Partners) said on CNBC’s “Closing Bell: Overtime”:

Overall theory is that we’re seeing significant adoption for the public cloud and MSFT will benefit tremendously from that. So, I have limited concern here. If you’re not a holder, I think after this report you should take advantage of the price discount.

He did agree that the growth in “Intelligent Cloud” was decelerating but attributed some of it to currency headwinds. Excluding those, Azure was still up 42% year-on-year.

Nonetheless, the macro challenges, Microsoft says, will bring that currency-adjusted growth in Azure down to 37% in the current quarter versus analysts at 39.4%.

Jefferies’ analyst talks valuation

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On a separate CNBC interview, Jefferies’ Brent Thill also did not raise much of a concern on how Microsoft is valued.

I think Microsoft is valued on earnings. At maybe $12 of earnings next year, you have to put a mid-20 multiple to get upside. We think that’s still reasonable to get there on the valuation of the stock.

In the near term, though, he recommends caution at least for as long as we get more clarity on what the macro environment will look like for the tech space moving forward.  

Wall Street has a consensus “buy” rating on the Microsoft stock.

Microsoft Corp Q1 earnings snapshot

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  • Net income tanked 14% year-on-year to $17.6 billion
  • Per-share earnings slipped from $2.70 to $2.35
  • Revenue saw annualised growth of 11% to $50.1 billion
  • Consensus was $2.31 a share on $49.7 billion revenue

Other notable figures in Microsoft’s earnings report include “Productivity & Business Processes” revenue that climbed 9.0% to handily beat the consensus. “More Personal Computing” brought in $13.3 billion – also slightly better than expected.

Operating expense, as per the tech behemoth, will grow at a meaningfully slower pace next year as it focuses on improving employee productivity.


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