Microsoft’s share price breached $51
As we discussed earlier, Microsoft (MSFT) exceeded analysts’ expectations for fiscal 1Q16. This boosted Microsoft’s share price by ~8%, as the share price chart below shows.
However, as the day progressed, Microsoft’s share price crossed $51—a hurdle that it had not crossed the past 15 years—on October 22, 2015.
Margin expansion led to EPS growth
In 1Q16, Microsoft’s revenues of $21.7 billion fell 7% on a YoY basis. However, in constant currency terms, this fall was 2%. In spite of YoY fall in revenues, Microsoft’s non-GAAP (generally accepted accounting principles) EPS (earnings per share) of $0.67 managed to beat analysts’ estimates by $0.08. It grew 15% on a YoY basis in constant currency terms.
Improvement in EPS could have come from the expansion in margins that had been on a fall the past couple of quarters. In 1Q16, Microsoft’s non-GAAP operating margin stood at 32.6%, an improvement over previous quarters’ operating margins that were below the 30s range. In 4Q15, Microsoft reported an operating loss of $2.1 billion.
Effective transition and growth in the cloud segment fuelled the expansion in margins as seen by the 8% YoY growth in the company’s Intelligent Cloud segment. It’s also the segment that has the highest operating margin. With $5.9 billion revenues, Intelligent Cloud was the best-performing segment of Microsoft in 1Q16.
As for fiscal 2Q16, Microsoft expects its revenues to land in the range of $24.8–$25.4 billion. Analysts expect the company to post $25.1 billion. Microsoft’s improved guidance for 2Q16 also played a significant role in the rise of its share price.
You can consider investing in the SPDR S&P 500 (SPY) to gain exposure to the technology sector, where the ETF invests ~18% of its holdings.