Microsoft Corporation (MSFT): Earnings Make it a Strong Buy

The entire PC industry is in a slump; the data from research firms confirms that there has been a significant decline in PC shipments. A number of different companies rely on the PC industry for their growth, including some major semiconductors and OEMs (Original Equipment Manufacturers). However, Microsoft Corporation (NASDAQ:MSFT) has the responsibility to instigate a comeback through its Windows platform. The software giant is the pioneer of the PC revolution and has played a primary role in shaping the global village we live in today. The company has major stakes in the PC business, and its Windows segment is the leading contributor to the top line at 28%.

Microsoft Corporation (NASDAQ:MSFT) has been trying to diversify into handheld devices, but the Windows Phone has not received enough traction. The company has recently partnered with Nokia Corporation (ADR) (NYSE:NOK) to make another attempt at the handheld pie. Windows Phone 8 has been appreciated by the market for having a fresh look but lags behind due to limited ‘application coverage.’ The ‘apps’ have become a basic part of the smartphone experience, and a new platform like Windows 8 will need time to attract enough developers to compete with Android. Despite these shortfalls recent figures show that Lumia sales have finally started to pick up. According to the most recent financial statements, the company has reported a q/q increase of 27% in Lumia sales and has also given forecast of even better growth in upcoming quarters.

Quarter

Microsoft Corporation (NASDAQ:MSFT) recently reported results for the first quarter of this calendar year. The market expectations were not high considering the negative news coming from the PC industry and lukewarm response to the Windows platform. The street was expecting Microsoft Corporation (NASDAQ:MSFT) to post an EPS of $0.68 on revenues of $20.5 billion. The software giant posted an EPS of $0.72 on revenues of $20.49 billion, barely missing the revenue estimates and beating earnings expectations.

The primary reason behind the earnings beat was better expense management and high margins on new offerings. The Windows segment also nearly met street expectations with revenues of $5.7 billion as compared to estimates of $5.9 billion. The company recognized revenues of $1.1 billion, which was originally received in June 2012. These were basically prepayments on Window sales which have now been moved to ‘earned’ and are visible on the top line.

Catalysts

Microsoft Corporation (NASDAQ:MSFT) expected the Windows 8 to act as a major catalyst for the PC market, but that has not happened due to a number of reasons. One of the primary reasons has been the inability of current hardware to give the optimal Windows 8 experience. Intel Corporation (NASDAQ:INTC) is ready to remedy some of these issues with its latest Haswell chips. This new hardware can kick-start a major upgrade cycle and greatly benefit Windows sales. According to reports the codename Haswell chips will be 20x more efficient as compared to existing Ivy Bridge structures. Intel Corporation (NASDAQ:INTC) is promising that battery life of as much as 13 hours on Haswell, which is phenomenal by any means.

Conclusion

Microsoft Corporation (NASDAQ:MSFT) jumped 3.4% on earnings as the street responded positively to the unexpected earnings beat. The top line performance should improve further in the next few quarters as the royalties from Windows Phone 8 start to arrive. The improved Lumia sales are another positive sign, and investors should expect sales to further improve in 2H2013. Haswell is the next major catalyst for the entire PC industry and has the ability to stem the slump. At a P/E of 9.9x and yield of 3.1%, the current quarter gives investors only more reasons to invest in Microsoft Corporation (NASDAQ:MSFT).

The article Earnings Make it a Strong Buy originally appeared on Fool.com and is written by Mohsin Saeed.

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