The Outlook for MSFT Stock
Earnings season is in full swing and Microsoft Corporation (NASDAQ:MSFT) will be back under the microscope after the closing bell today. A lot of seemingly negative things happened in the second quarter, but MSFT stock could surge if the company beats forecasts.
Analysts are forecasting earnings per share (EPS) between $0.58 and $0.60, which is slightly less than the company’s EPS in the same year-ago period. Although the company has a long history of outperforming these estimates, they fell short last quarter, which led to a sharp stumble in MSFT stock.
The share price fell roughly five percent over the last three months, but revenue is expected to remain even at $22.1 billion. Don’t put too much stock in those estimates, however. Microsoft has topped revenue estimates for 11 straight quarters.
Will MSFT Stock Deliver This Quarter?
What could make it difficult for MSFT stock to repeat its performance is the company’s pricey acquisition of LinkedIn Corp. That buyout was viewed as an attempt to bolster Microsoft’s cloud computing business, but markets will soon judge whether or not it worked. (Source: “Microsoft earnings need to show cloud growth after LinkedIn buy,” MarketWatch, July 18, 2016.)
Analysts weren’t exactly encouraged at the $26.2-billion price tag on the LinkedIn acquisition, but they at least understand the logic behind the deal.
Microsoft’s “Azure” division needed LinkedIn’s enormous pile of data to step up its fight for greater market share in the cloud computing business. The social network has information on 433 million business professionals—a demographic that falls right into Microsoft’s wheelhouse. There is a natural overlap between the two firms.
Another possible headwind is the Brexit-induced damage. After Britain’s decision to leave the European Union, analysts have been vigilantly looking for signs of contagion. Microsoft’s earnings could give us a sign of the after-effects. For instance, demand for IT spending was lower than expected. That is slightly worrying, but I don’t think it’ll be enough to offset the rise of cloud-based services.
Here’s why: Microsoft has been signing deals left and right for its Azure platform, including partnerships with International Business Machines Corp. and General Electric Company.
The growth of Microsoft’s cloud computing division is almost guaranteed to prop up MSFT stock. Estimates suggest that only five percent to 10% of corporate workloads are currently on the cloud, meaning there is a staggering amount of business left untapped.
This 90%–95% of enterprise contracts is worth approximately $1.2 trillion. If Microsoft is able to capture a fair bit of this market, MSFT stock’s share price would experience a sharp breakout.
This isn’t the old, dusty Microsoft that tried (and failed) to launch a smartphone brand. The company has turned over a new leaf. That whole smartphone endeavor has been left in the company’s past.
In May, the company rescinded its promise to have one billion active devices by 2018, effectively nixing the “Windows Phone” idea. It will still keep some production active, but it’ll be tailored for companies that want a package deal of Microsoft’s hardware. (Source: “Microsoft announces streamlining of smartphone hardware business,” Microsoft Corporation, May 25, 2016.)
“We are focusing our phone efforts where we have differentiation—with enterprises that value security, manageability and our Continuum capability, and consumers who value the same,” said Satya Nadella, chief executive officer of Microsoft. “We will continue to innovate across devices and on our cloud services across all mobile platforms.” (Source: Ibid.)
The Bottom Line for MSFT Stock
That’s the new mentality at Microsoft: “We’ll do what we do best.”
The company is nixing 1,850 jobs related to its smartphone division and writing off the abysmal Nokia acquisition at a cost of $950 million. This isn’t just a good move; it’s a necessary one. What Microsoft needed was a clean slate and a new direction.
The sins of that Nokia deal needed to be exorcised from Microsoft and cloud computing is the right cure. Cloud computing is a growing business in which Microsoft is exceptionally well positioned. As a result, MSFT stock has a fairly rosy outlook for its second-quarter earnings review.