Microsoft Delivers Impressive FQ4 Earnings- But Needs More Tricks Up Its Sleeves

Upon releasing fiscal fourth quarter results, Microsoft Corporation (NASDAQ:MSFT) shares jumped to new heights, hitting $74.22 by the end of trading day on Thursday and continued to climb after hours. Numbers were certainly striking, beating out consensus expectations, particularly when considering non-GAAP revenue and operating margin upside, which brought in a $400 million outclass. Additionally, Office 365, Dynamics 365, and Azure once again took center stage and increased to $18.9 billion, representing a 56% year-over-year increase, while commercial cloud bookings grew by 30%. Top analyst Richard Davis of Canaccord believes that while “results were legitimately solid” the company would have to make changes to keep up with other major large tech providers.

From Davis’ perspective, the “large cap technology has increasingly become a world of walled gardens, whether that is Apple, Salesforce, Google, or Microsoft […] how long Microsoft can mine its four Walled Gardens: O365, Xbox, Marketing Tech and Azure, all the while managing the replacement of its legacy revenue streams with those new, more compelling growth drivers.” The analyst points to the company’s own expectations that signal a decrease in both gross margins and operating margin by F2018 due to cloud increasing, LinkedIn amortization along with hardware launches like Xbox One X.  Moreover, Davis highlights, “30% commercial cloud bookings growth in the quarter was aided by an every three years seasonally large expiry base – so the impressive growth was a combination of strong execution and timing.”

With all that said, Microsoft came out ahead of the analyst’s estimates on nearly every vertical, including, $24.7 billion in FQ4 revenue, which finished a half billion ahead of expectations; 28.4% operating margins were 0.4% higher than original estimates; $8.7 billion in company generated FCF and on this fragment Davis did not even come close. Also, revenue related to Productivity, Business Processes, and Personal Computing all rose above estimates at $146 million, $134 million, and $270 million, respectively.

As such, Davis is cautiously optimistic on Microsoft’s prospects, reiterating Hold rating on the stock while increasing the price target from $68 to $76, which represents a 3% rise from current levels. (To watch Davis’ track record, click here.)

TipRanks analytics indicate MSFT as a Strong Buy. Over the past 3 months, TipRanks polled 19 analysts regarding Microsoft and has found 17 to be bullish, 1 neutral and 1 bearish. The consensus target price stands at $77.47, representing a 4% upside from current market levels.

Qualcomm Long-Term is Not as Strong Amid Legal Contentions

Though QUALCOMM, Inc. (NASDAQ:QCOM) yielded some revenue upside thanks to strength in chips as well as an EPS outperformance on tax advantage, revenues fell 11% with a hit of 40% in its net profit on a year-over year basis in the fiscal third quarter. These heavy losses are due to ongoing legal battles with some major players. The company paid $927 million to the Korea Free Trade Commission, $940 million payment to Blackberry in a royalty dispute settlement, and Apple is continuing to withhold its payments to Qualcomm, charging the company with excessively high licensing fees. In light of this mess, the QCOM patent-licensing division also saw its revenue drop by 42% to $1.2 billion. BMO analyst Tim Long notes that while the print exhibits mixed results, he nonetheless remains apprehensive in the grander scheme, as the “long-term picture is less positive.”

Long opines, “We see the stock trading in a range during the prolonged conflict with AAPL. For the legacy business, we see multiple negative catalysts. For the royalty business, we believe management is too optimistic about industry growth. For the chip business, we see share losses continuing.”  The analyst further underscores new issues have arisen with another vendor, which he “assumes to be Samsung.” Long believes that “Samsung pays at a much lower royalty rate than most of its peers, we estimate $250M of missed revenues attributable to them in the quarter (we had already modeled $150 million impact following last quarter’s partial underpayment).” This is just more bad news for the already troubled company, which could explain why the chip maker did not provide a TRDS metric. The analyst estimates March TRDS of $66B to include Apple and Samsung, but could not factor in a number of non-compliant Chinese vendors.

Despite all the negative factors, the analyst mentions that both revenue and EPS rose slightly above his estimates, but landed right in line with consensus at $5.3.billion and $0.83, respectively. In reaction, the analyst slightly boosts the price target from $54 to $55 while reiterating a Market Perform position on QCOM. (To watch Long’s track record, click here.)

TipRanks analytics indicate QCOM as a Strong Buy. Over the past 3 months, TipRanks polled 6 analysts regarding Microsoft and has found 6 to be bullish amd are 12 neutral. The consensus target price stands at $61.63, representing a 15% upside from current market levels.