Microsoft's Q1 earnings are a 'cloud home run': Analyst

Dan Ives, Wedbush Senior Equity Analyst, analyzes Microsoft's Q1 earnings report.

Video transcript

- Microsoft shares, they are in focus here. And following the company's earnings report just a few minutes ago, you can see shares up just around 1%. Earnings per share coming in at $2.27 adjusted, that was better than what the Street was expecting. Revenue of just over $45 billion is about a 22% jump from what we saw a year ago.

We know that Microsoft's Intelligent Cloud segment, that was a huge focus here for investors. Revenue in that division coming in just around 31% or, excuse me, showing 31% year-over-year growth. And taking a look at that number here, the revenue Intelligent Cloud coming in at $16.96 billion.

We want to bring in Dan Ives. He's Wedbush's senior equity analyst, for a little bit more on this. And, Dan, just taking a look at, not much of a reaction in shares. You can see the stock up just around 1%. But what do you think of these results?

DAN IVES: This was a cloud home run. I mean, if you look at the Azure number, whispers were about 46-47% growth, came in at 50%, really beat across the board. I expect strong guidance on the call. I think this is just more fuel in the engine to drive the stock higher. It just shows Nadella in this cloud arms race is continuing to gain share.

- And Dan, as we look at the report, I checked something on the Yahoo page, that the stock is up year to date 40%. So if an investor is thinking, OK, now I'm going to jump in, would you have them focus just on the fact that they seem to be hitting the home run, as you say, when it comes to Azure, or should they be looking more at, you know, where the Xbox falls into the personal computing sector? And can they expect this kind of growth in, you know, the next two or three quarters?

DAN IVES: Yeah, this is all about the cloud transformation. I mean, they've turned into a cloud behemoth. At Microsoft, what Nadella has done is a big part of the re-rating in the story. I mean this is a $2 trillion market, that's still in the third inning of playing out.

On a cloud transformation, I think that's how you get a stock with a 4 in front of it. Everything else, I kind of view as gravy, Xbox, I mean, fundamentally, that's really noise to the story right now. And if you look at these results and guidance, as we've seen over the last few years, I think 24 hours from now, a week from now, this is a stock on its way to 400.

- Dan, I know you're going to say this is just a sideshow here. But bringing up its PC business, because, of course, it has implications here, just in terms of the chip shortage, how significantly that is hitting Microsoft, is this something that investors just simply aren't worried about, given the out-performance of what you're talking about, of what we're seeing in cloud?

DAN IVES: Look, it's a great point that you bring up, and our thought going into earnings is that, when the New York City cab driver is talking about a chip shortage, it's out there. And I think investors are kind of looking through that dynamic and also understand it's transitory. But also, this is a cloud story.

I mean, fundamentally, it's our best cloud play. I think it speaks to what you're seeing in terms of the secular demand, digital transformation. And right now Nadella has the golden touch. And that's continuing to actually accelerate, not slow down.

- Dan, I'm curious, there are the stories about Russian hackers targeting Microsoft and Azure's cloud services. Could that pose a threat going forward, because it seems to be a daily thing that Microsoft is having to deal with.

DAN IVES: Yeah, Microsoft is obviously caught in the middle. I mean, we saw it with the SolarWinds attack a year ago. But I think what this shows, more and more companies, governments, moving to the cloud, and tangentially that's a massive beneficiary for cybersecurity, companies like Zscalar, Tenable, CrowdStrike, among others.

And I think Microsoft is going to further and further be entrenched on cybersecurity. And that kind of, they can, I call it a one-two punch in terms of what you're seeing on cloud and cyber. I don't view those hacks as really stopping the cloud party here. But it just shows more cautionary, need to have software in there to protect from the bad guys.

- Dan, what's the number one question that you want to hear answered on the call tonight?

DAN IVES: I mean, look, I think the biggest question is about what they're seeing in terms of the acceleration of this cloud growth story. Go back to the last six months. The haters will say that this was going to be a decelerating cloud, because of a COVID pull forward. Instead it's the opposite.

So given more clarity around what they're seeing from enterprises, that's going to be the key. And that's why I think coming off the call, this is just combined with what I believe is going to be beatable guidance. I think that is going to be front and center for investors.

- What's the key question the analysts are going to ask them when that call begins?

DAN IVES: Look, I think the key question, though, really to ask is, because it's not just for Microsoft, it's about the broader cloud story, in terms of what's going on, because this is not just about Microsoft. I mean, tangentially, this is bullish for Salesforce.com, Oracle, DocuSign, cybersecurity. I think that's really the tea leaves that everyone wants to see.

But I think this is just another sort of trophy case report for Nadella and Redmond, as we've seen in these numbers.

- Dan Ives, always great to get you on here with your instant reaction.

DAN IVES: Thank you.

- Again Microsoft shares moving to the upside. A lot of that has to do with the strong numbers from its Azure and its cloud services that Dan has been talking about, growth there just around 50%, better than what the Street was expecting. So certainly a number, or certainly a stock to keep in mind as we turn our focus to tomorrow's opening bell.