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Microsoft shares increase from record close after easily beating expectations for the holiday period

Microsoft Corp. blew away earnings expectations Tuesday as it surpassed $40 billion in sales and $15 billion in profit in a quarter for the first time, sending shares up from their record closing price.

Microsoft $(MSFT)$ has found strong gains during the COVID-19 pandemic, as companies rely on cloud computing from Azure and cloud-software offerings like Teams to keep employees connected while they work from home. Sales in the cloud and personal-computer segments led the way in Tuesday's report, easily beating expectations as demand for PCs and remote computing power continued through the end of 2020.

In the holiday quarter, Microsoft reported earnings of $15.46 billion, or $2.03 a share, on sales of $43.1 billion, strong growth from the same quarter a year ago, when Microsoft reported earnings of $1.51 a share on sales of $36.9 billion. Analysts on average expected Microsoft to report fiscal second-quarter earnings of $1.64 a share on revenue of $40.23 billion.

Shares jumped 4% in after-hours trading following the announcement, after the stock established a new all-time closing high of $232.33 in the regular session, topping a previous record from Sept. 2, 2020. Microsoft stock has increased 40.8% in the past 12 months, as the Dow Jones Industrial Average -- which counts Microsoft as a component -- has increased 6.8%.

The product that has most excited investors and analysts in recent years has been Azure, Microsoft's cloud-computing rival to Amazon.com Inc.'s $(AMZN)$ Amazon Web Services, or AWS. The company said Tuesday that Azure grew 50% in the second quarter -- Microsoft does not provide actual financial performance of Azure even as rivals such as Amazon and Alphabet Inc. $(GOOGL)$(GOOGL) break out the performance of their cloud-computing offerings -- and that sales in its "intelligent cloud" segment grew to $14.6 billion from $11.87 billion a year ago. Analysts on average expected cloud revenue of $13.77 billion, according to FactSet.

"This is a shot across the bow at Amazon and Bezos, they're gaining more and more shares vs. AWS," Wedbush analyst Dan Ives told MarketWatch in a brief interview after the numbers hit Tuesday. "A year from now, this could start to be a head-to-head battle."

Ives said that even those bullish on Microsoft weren't expecting Azure to grow by 50%. Azure growth had been slowing steadily, and Microsoft reported growth of 48% and 47% in the two previous quarters; Ives said expectations were closer to 44% to 45%.

Microsoft is "firing on all cylinders and these numbers start to drive the stock to a $2 trillion market cap," Ives said.

As personal-computer sales spiked due to work-from-home needs and Microsoft began selling new Xbox consoles in the holiday season, sales in Microsoft's "more personal computing" segment grew to $15.12 billion from $13.21 billion in the same quarter a year ago. Analysts on average expected segment sales of $13.47 billion. Microsoft said that revenue from Xbox grew 40% in the quarter, while sales of its Surface lines of PCs increased 3%.

Microsoft's "productivity and business services" division, which includes cloud software assets such as its Office suite as well as LinkedIn and other properties, reported revenue of $13.35 billion, up from $11.83 billion a year ago. Analysts on average expected sales of $12.89 billion.

For the fiscal third quarter, Microsoft projected sales topping $40 billion yet again, with guidance for $40.35 billion to $41.25 billion. Analysts on average were projecting revenue of $38.74 billion ahead of the report.