The Sheer Number of Growth Drivers Microsoft Now Has Is Impressive
As Microsoft (MSFT) rallies to new all-time highs (and flirts with a $1 trillion market cap) following a strong March quarter earnings report, much of the media coverage of the report has focused on the strength of its Azure cloud platform, which kept defying the law of large numbers by delivering 73% annual revenue growth and (via long-term Azure contracts) helped drive an impressive 30% increase in Microsoft's commercial bookings.
But while Azure's growth is impressive -- with each quarter, Azure further burnishes its status as a strong No. 2 player in the public cloud services space -- it's just one of several businesses that recorded impressive growth last quarter. Here are some of the others:
- Thanks to Office 365's momentum (and when it comes to enterprise sales, its pricing power), Microsoft's Office commercial revenue rose 12% annually, and its Office consumer revenue rose 8%.
- LinkedIn revenue rose 29%, with user sessions rising 24%. It's worth noting that LinkedIn's revenue growth is higher than what it was at in Q3 2016, its last full quarter as an independent company.
- Dynamics business app revenue rose 13%, thanks to a 43% revenue increase for Dynamics 365 subscriptions. Tech analyst Patrick Moorhead thinks Dynamics 365's growth suggests Microsoft is taking some customers from Salesforce.com (CRM) and Oracle (ORCL) .
- In spite of a soft PC market, Windows OEM revenue (driven by license sales to PC makers) rose 9%, while Windows commercial revenue (driven by license sales to businesses) rose 18%. To be fair, Microsoft did caution Window OEM revenue growth will slow this quarter.
- Traditional server software sales rose 7%. While this might not seem like much, it compares quite favorably to the negative growth that firms such as Oracle and IBM (IBM) have been seeing for traditional software license sales.
- Surface hardware revenue rose 21%. Last fall's Surface Pro and Surface Laptop refreshes appear to have been well-received.
- At a time when the current game console cycle is nearing its end, Xbox software and services revenue rose 12%.
It's worth noting that many of these growth rates would have been a little higher if not for currency swings. Though Azure and to some extent Office 365's success grab the limelight, the sheer number of Microsoft businesses that are reporting strong growth and/or taking market share is perhaps the biggest testament to how much Microsoft's execution has improved since Satya Nadella became CEO in early 2014. And this execution certainly bodes well for the prospects of various Microsoft projects currently in motion, from its planned launch of a cloud game-streaming service to its attempts to integrate recently-acquired GitHub.
Microsoft's stock has definitely priced in some good news lately -- shares now trade for close to 25 times their fiscal 2020 (ends in June 2020) free cash flow consensus. But given how strong the company's execution and top-line performance currently looks, a bit of a valuation premium feels warranted.Facebook's Earnings Were Good, but Keep an Eye on 2 Risks
Facebook ( FB) is up around 6%, and at its highest levels since last July, following the release of a fairly strong Q1 report. Revenue of $15.08 billion (up 26% annually) beat consensus analyst estimates by about $100 million, and -- excluding a $3 billion charge related to an expected FTC fine -- EPS came in at $1.89, above a $1.62 consensus.There are some other things to like about Facebook's report. 20%-plus ad revenue growth was recorded in all four of Facebook's geographic reporting segments; monthly active users (MAUs) rose 8% annually and were slightly better than expected; and for the second straight quarter, a 30%-plus increase in ad impressions -- driven in large part by ads shown on Facebook's stories services and Instagram's feed -- easily offset a small decline in the company's average price per ad.
In addition, remarks shared on the earnings call suggest Facebook's swelling efforts to grow stories ad sales are progressing well. COO Sheryl Sandberg disclosed that Facebook now has over 3 million stories advertisers, up from over 2 million three months ago; for comparison, Facebook had 7 million advertisers overall as of early 2019. Mark Zuckerberg, meanwhile, disclosed that Instagram Stories, WhatsApp Status and (a little surprisingly, given its slow start) Facebook Stories all now have over 500 million daily active users (DAUs).
At the same time, CFO Dave Wehner reiterated that Facebook expects its annual revenue growth, which slowed to 30% in Q1 from 33% in Q4 on a constant currency basis, to continue decelerating over the course of 2019 on a constant currency basis. And notably, he forecast "ad targeting-related headwinds will be more pronounced in the second half of 2019."
When asked about those comments on the call, Wehner said several factors are impacting Facebook's ad targeting abilities. Among them: The number of users opting out of sharing information about the websites and apps they visit has (following the arrival of new Facebook privacy control and the EU's GDPR regulations last year) continued growing; mobile platforms are enacting changes that affect targeting and measurement; and Facebook has introduced targeting restrictions for certain ad types (in March, the company stopped allowing U.S. housing, employment and credit advertisers to target based on age, gender and zip code).
Given how important Facebook's user data and targeting abilities have been in driving the meteoric growth of its ad business over the last decade -- both in terms of creating pricing power and convincing advertisers to spend more on Facebook -- any major changes on this front would likely have big consequences. The risks that Wehner raised don't necessarily spell a major loss in targeting ability -- for example, even if Facebook can no longer track a user's activity on third-party sites and apps, it could still obtain a lot of data about that user from its own sites and apps -- but it's still concerning that he brought them up.
Also worth keeping an eye on: Facebook's MAU and DAU counts for North America, which still produces nearly half of its revenue and where concerns about declining usage for Facebook's core services have been especially pronounces. Though Q1 is a seasonally stronger quarter for social media usage than Q4, North American DAUs for core Facebook and Messenger were flat sequentially at 186 million and a little below analyst expectations; MAUs rose by a modest 1 million to 243 million.
Overall, Facebook's Q1 report and call featured many positives. But with its stock now up nearly 50% on the year, the risks posed by North American user growth headwinds and reduced ad-targeting abilities are worth keeping an eye on.
