As Apple (NASDAQ:AAPL) stock bounces back from the $150 lows, Microsoft (NASDAQ:MSFT) is in danger of losing the market cap lead over it. The quarterly earnings report triggered some selling pressure on the stock, while Apple stock rose ~9% in the weekly period. What happened?
In the fiscal 2019/Q2 period, Microsoft reported growth in all its segments. Intelligent Cloud grew the fastest, up 20% Y/Y and adding $9 billion to the $32.5 billion in revenue. Commercial Cloud gross margin is very healthy at 62.5% and up five points from last year.
Investors need not take notice of the stock dipping slightly. Management continues to return cash to shareholders while keeping costs (up 7%) in check. The company bought back $6.1 billion in shares and distributed $3.5 billion in dividends. Cash flow improved in the period, thanks to higher collections from customers. But free cash flow fell by 2% to $5.2 billion.
The FCF decline is due to Microsoft spending more on capital expenses to support its cloud business. This is ultimately a positive development because the business is highly profitable. In effect, profit margin and profits will both go up over time.
Office software sales grew by 11% Y/Y while LinkedIn revenue grew 30%. Though the Office sales is disappointing, the product is so useful and faces any real competition that the slow growth is probably temporary.
At 25 times earnings, Microsoft shares are not likely to dip by that much.
