Microsoft Overcomes PC Sales Slide

Thursday after the close, Microsoft reported earnings.  One conclusion that jumps out from the report and conference call is that Microsoft has overcome the so-called ‘death of the PC.’

Microsoft is generating about 70% of its profits from its commercial business, which is growing at about a 10% rate, yet Microsoft is trading at forward P/E (fiscal year ending June 30, 2015) of about 11. The stock looks inexpensive.

There have been two big factors that have kept Microsoft's valuation in check.  First, its earnings have not been consistent.  Now that Microsoft is shifting more to a service and subscription model from a perpetual license model, this should improve earnings consistency.

The second reason holding Microsoft’s valuation in check has been declining PC sales and the company not performing well in mobile. PC sales are still declining. According to Gartner, PC sales fell 8.6% to 80.3 million units in the last quarter.  IDC reported that sales fell 7.6% to 81.6 million units. Most of the decline in PC sales is coming from the consumer sector.  In spite of the PC sales trend against it and poor performance in the mobile sector, Microsoft's consumer and device revenues grew by 4% to $7.46 billion.  This indicates that Microsoft may be hitting an inflection point on the consumer side.

In quite a contrast to the consumer side, commercial revenues grew 10% to $11.2 billion.

Microsoft earnings came at $0.62 vs. analysts’ consensus estimate of $0.54.  Revenues came at $18.53 billion vs. consensus of $17.79 billion.

Microsoft stock responded positively and is trading up by about 6% in the pre-market.  Prior to the earnings, options pricing had indicated a move of about 4% in either direction.

From a technical perspective, if pre-market trading levels hold, the stock has broken out of the resistance zone of $34.95 to $35.15.  The next resistance zone is fairly wide from $35.80 to $36.50.  Prior resistance of $34.95 to $35.15 now acts as support.  Microsoft also offers an attractive 3.3% dividend yield.

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Disclosure: Subscribers to The Arora Report have long positions in Microsoft and Apple .