4 Key Takeaways from 2Q2021 Earnings
In its outlook earnings call for 3Q2021, the management mentioned that generally, due to increasing mix of large long-term Azure contracts which tends to be more unpredictable in timing of recognition, it may cause volatility in growth rate. They also mentioned a ‘sequential increase’ in capital expenditure as they continue to enhance their cloud services to meet growing global demand. We believe that this signals that we should not expect any strong growth in margin in the near term. However, we remain positive on its cloud business as this segment displays the highest growth momentum with a 3-year CAGR of 23.3%, compared to Productivity and Business Processes (14.4%) and Personal Computing (7.5%). (Figure 2)
In its 2Q 2021 results, combined revenue for these two segments grew 19.2% q-o-q, exceeding above pre-Covid levels and offsetting the negative impact from Covid-19 (Figure 3). For the quarter, Linkedin’s sessions grew 30% y-o-y to deliver record levels of engagement. We believe this validated the view that the advertising market is improving on the backdrop of positive economic outlook and demonstrated resilience in these two segments of Microsoft to weather the financial impact of the pandemic. With improving economic conditions and gradual recovery in the labour market, the management expects Linkedin revenue to continue its growth at the low 20% range.
For Intelligent Cloud segment, the management expects revenue between $14.7 to $14.95bn. This translated to a y-o-y growth of between 19.7% to 21.7%, slightly lower than current quarter’s growth of 23%. We believe that this is due to the high demand for cloud services in Q3 2020 due to Covid-19 which has seen a 27.2% y-o-y jump. Therefore, some demand may have been brought forward in Q3 2020 and the slowdown in growth for upcoming Q3 2021 should not be a cause for concern.
Lastly, for its More Personal Computing segment, the management expects revenue between $12.3 and $12.7bn. This translated to a y-o-y growth of 11.8% to 15.5%, comparable to current quarter’s growth of 14.3%.
Conclusion
We are positive on MSFT. Current P/E for MSFT stands at 36.8. On first glance, it may appear expensive by trending 1 standard deviation above its 3-year historical average. However, we believe that the valuation is justified, considering that strong growth across all its business segments is expected to continue. Strong growth momentum for its Cloud segment has also been validated in this result and may potentially strengthened Microsoft competitive position in the cloud computing market, currently dominated by Amazon’s AWS.
Jun Rong currently covers the U.S market, with focus on FAANG stocks. Previously an investment specialist, he constantly keeps in touch with the latest market trends to serve the needs of clients. Jun Rong also features in different media platforms such as Channel 8’s Morning Express show and provides market commentary for various newspaper like LianHe ZaoBao (联合早报) and Business Times. Jun Rong graduated from National University of Singapore (NUS) in 2017 with a Bachelor of Social Sciences with major in Economics.