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Microsoft Stock Rises After Software Giant Gives Reassuring Full-Year Outlook

Microsoft shares rose Wednesday even though the software giant missed forecasts for its fiscal fourth quarter because of unfavorable foreign exchange rates and weak PC sales. The company's upbeat guidance for the current fiscal year boosted MSFT stock.

The Redmond, Wash.-based company late Tuesday said it earned $2.23 a share on sales of $51.9 billion in the quarter ended June 30. Analysts polled by FactSet expected Microsoft earnings of $2.29 a share on sales of $52.4 billion. On a year-over-year basis, Microsoft earnings rose 3% while sales climbed 12%.

In constant currency, Microsoft earnings increased 8% while sales advanced 16%.

On June 2, Microsoft lowered its revenue and earnings forecasts for the June quarter, citing foreign exchange headwinds. Analysts also predicted that weak consumer spending trends would impact Microsoft in the period.

MSFT Stock Seesaws Late Tuesday

In after-hours trading on Tuesday, MSFT stock alternated between modest gains and losses ahead of the company's conference call with analysts. When Microsoft gave its guidance for the current quarter and full year on the call, Microsoft stock rebounded.

For the current quarter, Microsoft expects to generate sales of $49.75 billion, up 10% year over year. That's based on the midpoint of its guidance. But Wall Street had been looking for $51.4 billion in sales for the first quarter of Microsoft's fiscal 2023.

So far this quarter, Microsoft has seen continued weakness in PC demand and in advertising spending, Chief Financial Officer Amy Hood said on the call.

However, things look rosier for the full fiscal 2023. The news cheered MSFT stock investors.

"We continue to expect double-digit revenue and operating income growth in both constant currency and U.S. dollars," Hood said. "Revenue growth (in fiscal 2023) will be driven by continued momentum in our commercial business and a focus on share gains across our portfolio."

On the stock market today, MSFT stock rose 6.7% to close at 268.74.

Litany Of Reasons For June-Quarter Miss

Unfavorable foreign exchange rates lowered Microsoft's revenue by $595 million and cut earnings per share by 4 cents in the June quarter, the company said in a news release.

Also, Covid-related production shutdowns in China and a deteriorating PC market lowered its Windows software revenue by more than $300 million from the company's target.

Reduced advertising spending negatively impacted Microsoft's LinkedIn, search and news advertising revenue by over $100 million, it said.

Plus, Microsoft took a hit from scaling down its operations in Russia because of that country's war with Ukraine.

MSFT Stock Gets Price-Target Cuts

At least six Wall Street analysts cut their price targets on Microsoft stock after its earnings report. But MSFT stock also got one price-target increase.

Mizuho Securities analyst Gregg Moskowitz said Microsoft's full-year revenue and margin outlook was "healthy and better than feared." In a note to clients, he reiterated his buy rating on MSFT stock with a price target of 340.

"Notwithstanding what is clearly a more difficult operating environment, we remain confident that Microsoft's growth opportunities over the medium-term and beyond are greater than many realize, and that Microsoft is positioning for materially greater success in cloud," Moskowitz said.

Microsoft Cloud Business A Bright Spot

Microsoft's cloud computing businesses drove sales growth in the June quarter, Hood said in a written statement.

"In a dynamic environment we saw strong demand, took share, and increased customer commitment to our cloud platform," she said. "Commercial bookings grew 25% and Microsoft Cloud revenue was $25 billion, up 28% year over year."

Of Microsoft's three business segments, Intelligent Cloud was the top performer in the June quarter. Revenue in the segment increased 20% year over year to $20.9 billion. The unit includes server products and cloud services such as Azure infrastructure offerings.

Microsoft's Productivity and Business Processes unit saw sales rise 13% to $16.6 billion. The division includes Office productivity software as well as the Dynamics and LinkedIn businesses.

Further, Microsoft's More Personal Computing unit posted a 2% increase in sales to $14.4 billion in the fiscal third quarter. The unit includes Windows software, Xbox video games, Surface computers, internet search and advertising.

MSFT stock is on the IBD Long-Term Leaders stock list.

Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.

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