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Microsoft’s Share Price Crossed Its 15-Year Barrier of $51

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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.

[marketrealist-chart id=749079]

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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.

Owing to the high margins associated with the cloud, IBM (IBM) is also investing billion dollars in the cloud space. IBM divested its x86 server division to China-based (FXI) Lenovo (LNVGY) in 2014.

2Q16 expectations

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.

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