On Thursday, Microsoft (MSFT) reported in-line fiscal first-quarter results. We are maintaining our mid-$30s fair value estimate and think the firm would be a nice addition to our Best Ideas portfolio upon technical improvement. We’re also not hurting for additional technology exposure, as we already hold eBay (EBAY), Intel (INTC), and Apple (AAPL).
The software giant’s revenue advanced 7% in its fiscal first quarter, while net income and diluted earnings per share jumped 6% and 10%, respectively (the bottom line number met consensus, but disappointed some). All major reporting segments—Windows, Server and Tools, Online Services, Microsoft Business, Entertainment and Devices—experienced top-line expansion, though only its Server and Tools (read “cloud”), Microsoft Business (“Office”), and Online Services divisions (“Bing”) showed improvement in operating income, and its Online Services business remains in the red.
We think the Server and Tools segment will benefit from “Windows Server 8” in coming periods, while we expect continued growth in its Microsoft Business division from Lync, Sharepoint, and Exchange—which all grew double-digits in the third quarter. As for Windows, momentum slowed in the quarter with Windows 7, and the firm is looking forward to launching the next upgrade, “Windows 8,” which it unveiled at the recent BUILD conference. However, much of Windows’ growth will be dependent on underlying growth in personal computers, which are competing structurally with mobile and tablets. Bing continues to grow market share in the US, the Xbox remains the top-selling gaming console in the US, and the firm completed its acquisition of Skype.
All in all, it was business as usual at Microsoft, and the firm seemed quite enthusiastic about the holiday season: “With a great set of consumer products like Windows 7 PCs, Windows Phone 7.5, Xbox and Kinect, we are excited about the holiday buying season.” We’re growing much more interested in Microsoft given its recent dividend increase–the firm now boasts nearly a 3% yield.