Microsoft | Fundamental Analysis

The Nasdaq was down nearly 2 percent Tuesday as e-commerce company Shopify announced a 10 percent layoff to help it deal with lower-than-expected demand for its platform. This spooked investors in tech companies as they wondered what else might be on the horizon this earnings season. Against that backdrop, coupled with an overall tough year for tech stocks, investors were probably hoping for some encouraging news when software giant Microsoft reports earnings Tuesday.

Although Microsoft's results, unfortunately, came in below analysts' consensus forecasts on two metrics, there's still plenty to like about the report. But to see the positives, you have to look at the situation from a different angle. For example, the results are good in light of a more conservative valuation of the stock after a 25 percent drop in its price this year. In addition, a close look at the report shows that Microsoft's cloud computing business, Azure, continues to show strong growth.

Microsoft's revenues for its fiscal fourth quarter, which ended July 26, rose 12 percent YoY to $51.9 billion. However, in constant-currency terms, revenues were up 16% YoY. Revenue growth was also impacted by YoY comparisons: revenues for the prior period were up 21% YoY.

Net income for the period was $16.7 billion, representing earnings per share of $2.23. This key earnings per share figure compare to $2.17 in the year-ago quarter. On a constant currency basis, earnings per share were up 8% YoY.

Microsoft's cloud computing business had an outstanding quarter. The company's Azure and other cloud services segment saw revenue grow 40% YoY or 46% in constant currency terms. It's worth noting that this figure isn't too far off from the 49% growth in a constant currency that Azure posted in the period that ended three months earlier. This kind of growth rate is welcomed by investors at a time of heightened global economic uncertainty.

There have been occasions in the past when such results might have been worrisome. For example, Microsoft had a price-to-earnings ratio of more than 40 at one point in 2020. Such a high valuation requires not just good, but impressive results. But one of the advantages of the Nasdaq falling 26 percent this year is that the stock is trading at a more reasonable value.

Microsoft's fourth fiscal quarter results show that the technology company is performing well in the face of tough YoY comparisons, currency headwinds, and an uncertain operating environment. Moreover, the company's net income margin of 32% is a breath of fresh air as investors struggle with the continued losses of many young tech companies, whose stock prices rose in 2020 and 2021 and then collapsed in 2022. Microsoft's solid earnings and healthy balance sheet are probably more valuable today than they were a few years ago.

Thanks to notable performance in tough times, investors should take a closer look at Microsoft to see if it's worth investing in the company while the stock is trading at a very reasonable price.