Microsoftit is (MSFT 4.81%) the stock price rose 5% during after-hours trading on Tuesday, April 26, following the release of its third-quarter earnings report.

The tech giant’s revenue rose 18% year-on-year to $49.4 billion, beating analysts’ estimates of $350 million. Its net profit rose 8% to $16.7 billion, or $2.22 per share, but beat analysts’ expectations of $0.25.

Those numbers were mixed, but the market response suggests that its strengths outweigh its weaknesses. Let’s take a look at five green flags for Microsoft’s future and see if they make its stock a worthwhile investment.

1. Stable growth in all three businesses

Microsoft divides its business into three segments, each of which brings in about a third of its revenue.

The Productivity and Business Processes division hosts its Office, LinkedIn and Dynamics services. The Intelligent Cloud division manages its server products and Azure cloud infrastructure platform. The More Personal Computing division sells its Windows licenses, Xbox consoles, Surface devices and online advertisements through its search engine and portals.

These three companies generated strong double-digit sales growth in fiscal 2021 (which ended last June) and the first three quarters of fiscal 2022:

Data source: Microsoft. YOY = year after year.

2. Its total cloud revenue continues to skyrocket

Microsoft’s total cloud revenue, which includes all cloud-based services across all three business segments, grew 32% year-over-year to $23.4 billion , or 47% of its turnover, in the third quarter. This closely watched growth rate has consistently remained above 30% over the past year.

The main growth drivers for this cloud segment are Azure, the second largest cloud infrastructure platform in the world after Amazon (AMZN -0.88%) Web Services (AWS); Office 365 Commercial; and Dynamics 365. Here’s how these three growth engines have fared over the past five quarters:

Data source: Microsoft.

Azure’s strong growth indicates that many large companies, especially retailers, don’t want to power Amazon’s most profitable business. Additionally, Canalys estimates that Azure’s global market share increased two percentage points year-over-year to 22% in Q4 2021, while AWS’s market share did not increase. increased by only one percentage point to 33%.

Office 365’s steady growth indicates it has succeeded in transforming its desktop-based Office software into cloud-based services, while Dynamics continues to grow faster than its big rival Selling power (RCMP 2.71%) in the cloud-based customer relationship management (CRM) market.

3. Stable gross and operating margins

When CEO Satya Nadella aggressively accelerated Microsoft’s cloud-based expansion eight years ago, bears argued that ambitious transformation would crush its margins. However, Microsoft’s margins eventually leveled off after overcoming its initial spending spree, and economies of scale began.

This stability persisted in its last quarter, as its gross and operating margins remained stable on a sequential and year-over-year basis:

Data source: Microsoft.

In other words, Microsoft’s third-quarter revenue shortfall wasn’t caused by declining margins. Instead, it attributed its weaker-than-expected net profit growth to its losses on its equity investments, which are less of a concern than a contraction in its gross or operating margins.

4. Healthy returns for shareholders

Microsoft’s healthy margins allow it to generate stable profits and return much of its cash to investors. Its free cash flow (FCF) rose 17% year over year to $20 billion in the third quarter, and it spent $12.4 billion of that total on buybacks and dividends.

This stable cash flow growth should protect Microsoft from inflation and rising interest rates, which typically generate stronger headwinds for unprofitable businesses with negative cash flow. Its 0.9% forward yield might not attract serious investors, but its strong FCF growth indicates it still has plenty of room for future dividend hikes.

5. Pink outlook with a reasonable valuation

Analysts expect Microsoft’s revenue and profit to rise 18% and 16% respectively this year. The stock’s 20% pullback this year, which was primarily caused by macroeconomic rather than microeconomic issues, has also reduced its price-earnings ratio to 25. This reasonable multiple – which seems more appropriate for a consumer goods company consumer staples than a growing cloud software company – should limit its downside potential.

It’s hard to find major faults in Microsoft’s business, and it remains a well-diversified play on the secular growth of the cloud and gaming industries. Its stock could remain volatile in this choppy market for tech stocks, but investors who ignore the noise could be well rewarded going forward.