As I write this, shares of Microsoft (MSFT) are rallying 5% following its fiscal fourth-quarter report. Microsoft has had a bumpy ride in 2016 thus far; does today’s announcement mark a turning point for the software giant? Let’s find out.
According to management, the fourth quarter capped what has been a “pivotal” year for the company. Last quarter, Microsoft brought in $22.6 billion in adjusted sales, a 2% increase over a year ago. This topped analysts’ expectations of $22.1 billion in revenue. Notably, Microsoft’s cloud computing business saw sales more than double over last year.
Meanwhile, Microsoft turned a profit of $3.1 billion. This represents a major turnaround from the $3.2 billion loss reported a year ago. Excluding special items, adjusted EPS was $0.69. This beat the $0.58 EPS consensus estimate by 19%.
Microsoft also rewarded its shareholders handsomely during the fourth quarter, returning $6.4 billion between stock buybacks and dividends.
This was a solid report, so MSFT shares rose the most in nine months after the news. But is now really the time to buy MSFT? Personally, I’d proceed with caution. Microsoft currently earns a B-rating in Portfolio Grader, but its Stock Report card is somewhat mixed. MSFT barely squeaks by with a C-rated Fundamental Grade, and that’s because the stock fails on five of eight fundamental metrics. It’s possible that the stock’s Fundamental Grade will firm up once I’ve plugged in the latest results into the system.
However, Microsoft still has some challenges ahead of it. As I mentioned, the company’s biggest success was with its Azure cloud computing business, with 102% annual sales growth. However, Microsoft didn’t actually disclose Azure revenues in dollar terms. All we know is that this unit is lumped under Microsoft’s Intelligent Cloud business, which in turn makes up less than a third of total revenues.
Meanwhile, Microsoft’s Personal Computing unit—which accounts for nearly 40% of total revenues—saw sales fall 4%. Notably, sales of Microsoft phones plunged 71% compared with a year ago. This was partially offset by sales of Microsoft Surface tablets.
The fact remains that Microsoft is in the process of transforming itself. It can no longer depend upon traditional software for future growth. So, it is being forced to explore ways to stay relevant. A few weeks ago, Microsoft announced plans to buy LinkedIn (LNKD) for $26.2 billion. This represents the largest deal in the company’s history.
The bottom line is that there still is a lot of uncertainty with MSFT. It technically qualifies as a buy in Portfolio Grader, but I’d proceed with caution.