Microsoft Earnings: Nadella’s Turnaround is Working

Satya Nadella 2012

Microsoft CEO Satya Nadella

Microsoft (MSFT) crushed earnings estimates last night on better than expected growth in its cloud services business. I covered the release for InvestorPlace, and you can read my write-up here.

Here is a short excerpt:

The figure the Street was watching the closest was commercial revenues, as this gives the best indication as to the success of CEO Satya Nadella’s turnaround plan for the company.

Commercial sales came in better than expected, up 5% (7% on a constant currency basis). And within the segment, commercial cloud revenue, which includes Office 365 and cloud computing platform Azure, was the standout with revenue growth of 106% (111% on a constant currency basis). According to the press release, commercial cloud revenue is now on pace to generate $6.3 billion in sales annually. .

The key takeaway from this quarter’s release is that Nadella’s game plan is working. That’s great for Microsoft as a company. But what’s next for Microsoft stock?

At current prices, Microsoft is not dirt-cheap, but it’s certainly not expensive either. It trades for about 15 times next year’s expected earnings, which is a little lower than the broad S&P 500.

Yet a gargantuan 25% of Microsoft’s market cap is sitting in cold, hard cash. Yes, I understand that most of that cash is sitting offshore and that it won’t be repatriated anytime soon. But let’s discount that cash at 65 cents on the dollar to allow for a worst-case tax scenario. Even then, MSFT is sitting on a mountain of cash that would account for more than 16% of its market cap.

You can read the full article here.

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