Microsoft Q1: 3 Reasons Why Cloud Growth Outshines 25% Profit Drop

Event: Microsoft Q1, 2016

Did the Market Overreact to the Net Income Drop of 25%?

As you know, Microsoft has released earnings for Q1 2016 (or Q3 of Financial Year 2016). The profit drop of 25% (on GAAP basis) and the revenue drop of 6% have hurt the share prices. Some analysts believe that the markets could have over reacted. The company may have suffered a loss of revenue but has performed well in cloud segment. However, do you know why cloud services growth is more significant than 25% income loss? There are at least three reasons. Read on.

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Impact of Microsoft Q1 Released On Financial Performance

3 Reasons Why the Growth in Cloud is Significant:

For Microsoft, the highest growth segment as per Q1 is the cloud. The revenue has grown by 3%. (Compare this to 1% increase in productivity and PC divisions.)

  1. Cloud is a strategic alternative to the declining PC market. PCs are gradually losing the battle to mobile phones and tablets. According to a report, the number of units shipped in 2015 is the lowest in 8 years. Hence, the growth shown in cloud services will provide stability for the future.
  2. Cloud growth is a reaffirmation of company’s focus to tap the increasing demand. Organizations from start-ups to industry giants have started transformation to the cloud. Using cloud for their services and internal processes is both cost-effective and immensely scalable.
  3. The final reason why the growth in intelligent cloud segment is significant is as follows.
    This growth is a proof of a unique advantage that Microsoft has. A majority of clients already use services such as Microsoft Exchange server for emailing. Encouraging them to move to a cloud-based server is a relatively easy process.

How the Market Reacted?

The Q1 earnings release was on 21st April (Thursday). Compared to the close price on 21st April, the price fell by about 7.7% on 22nd April ending. Though the earnings disappointed many investors, some analysts think this is a short-term reaction. The reason for this is as follows. The company is now focusing on long-term strategic solutions like the cloud. These steps will benefit Microsoft in the years to come.

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