Microsoft report beat estimates, but Wall Street expected more from cloud revenues

Microsoft shares fell despite posting higher earnings per share and earnings than analysts expected on average. Investors were disappointed by the slowdown in sales growth for Microsoft’s cloud division.

Microsoft (MSFT) shares fell 2.3% after close of trading on Tuesday after the company released its fiscal 2021 third quarter report.

Microsoft reported an increase in earnings per share to $ 1.95, up $ 0.17 from analysts’ estimates of $ 1.78.

Revenue grew 19% year-over-year to $ 41.7 billion, up from an estimate of $ 41.03 billion.

Microsoft’s quarterly earnings and revenue statistics for the last two years are available here.

Microsoft Business Unit Revenues

Microsoft’s sales are split between three large divisions.

1. The Productivity and Business Processes division saw revenue growth of 15% to $ 13.6 billion, driven by strong sales of commercial software products such as Office 365 and Dynamics 365, which jumped 22% and 45% respectively.

Commenting on the report, CEO Satya Nadella also noted that the Microsoft Teams video conferencing and collaboration app has reached 145 million daily active users, nearly double the 75 million daily active users reported last year.

Social application Business Networks LinkedIn generated over $ 3 billion in ad revenue in the 12 months ended March 31, beating digital ad competitors such as Snap (SNAP) and Pinterest (PINS).

eMarketer predicts that LinkedIn will gain a 1.4% share of digital ad revenue in the US in 2021, up slightly from the 1.2% it had in 2019.

2. The Intelligent Cloud business grew 26% YoY to $ 15.1 billion, driven in large part by 50% revenue growth in Microsoft Azure. While this is a significant increase, it represents a slowdown compared to 59% growth in the same quarter last year.

The fall in Microsoft shares after the report was probably caused by the negative reaction of investors precisely to the slowdown in the growth of the company’s cloud division.

3. More Personal Computing reported a 19% increase in revenues to $ 13 billion thanks in large part to a 50% increase in sales of the Xbox Series X and S game consoles released last November.

Microsoft’s total PC shipments were up 32% for the quarter, according to Gartner Inc. However, according to Microsoft CFO Amy Hood, a worldwide chip shortage is limiting the availability of PCs and limiting the company’s ability to produce enough new Xbox consoles, introduced in November. The problem of semiconductor shortages is faced by equipment manufacturers around the world, for more details see article “The global shortage of semiconductors has affected the shares of these companies”.

The decline in Microsoft shares after the report can probably be called temporary, as the company maintains strong growth rates, and the current expectations of investors may be simply overestimated.

Commenting on the Microsoft report, Piper Sandler analyst Brent Bracelin noted that “investor expectations are rising, but sentiment remains generally bullish.”

Microsoft shares are up 50.5% in the past 12 months and 17.8% since the beginning of 2021.

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