Will Cloud Help Microsoft Stock Earnings Again This Time?
It’s earnings season again, and while everyone wants to know the performance of hot Internet names, you shouldn’t forget a key player in tech—Microsoft Corporation (NASDAQ:MSFT) stock.
Microsoft stock did not make headlines as often as some of the other tickers in the tech sector last year. But that doesn’t change the fact that MSFT stock’s performance wasn’t solid. In the past 12 months, Microsoft stock climbed more than 30%. Not bad for a company with a nearly $450-billion market cap.
Microsoft is going to report earnings later this week, but here’s what analysts are expecting.
Stats on Microsoft Corporation
|Analyst EPS Estimate||$0.64|
|Change from Year-Ago EPS||4.92%|
|Revenue Estimate||$22.11 billion|
|Change from Year-Ago Revenue||1.75%|
|Earnings Beats in Past 4 Quarters||4|
Source: Yahoo! Finance
Wall Street analysts are expecting some solid numbers from the “Windows” creator. At $0.64, the average estimate for earnings per share (EPS) is almost five percent higher compared to the same period last year. Revenue is also expected to grow, albeit by a smaller 1.75% year-over-year. (Source: “Analyst Estimates,” Yahoo! Finance, last accessed April 18, 2016.)
As a company known for providing operating systems for desktop computers, Microsoft stock might not look as attractive as before. And that’s because the global PC market has been shrinking. According to research firm Gartner Inc, worldwide shipments of personal computers declined 9.6% year-over-year in the first quarter of 2016. Moreover, this marked the sixth consecutive quarter of PC shipment declines. (Source: “Gartner Says Worldwide PC Shipments Declined 9.6% in First Quarter of 2016,” Gartner, April 11, 2016.)
Still, market downturns did not prevent Microsoft from running profitable operations. In all four quarters of 2015, the company managed to beat analysts’ EPS estimates every single time.
This time, Microsoft might be able to overcome the headwinds in the PC market again. And the key could be the strong growth momentum in its cloud business.
You see, since Satya Nadella took helm as CEO, Microsoft has been pursuing a “mobile first, cloud first strategy.” And so far, the strategy has worked pretty well.
In the previous reporting quarter, revenue from the company’s Intelligent Cloud segment grew 11% on a constant currency (FX-neutral) basis. The highlight was Microsoft’s “Azure,” from which revenue surged 140% on an FX-neutral basis. Revenue from Azure premium services more than tripled year-over-year. By the end of 2015, more than one-third of all Fortune 500 companies have chosen Microsoft’s Enterprise Mobility solutions. (Source: “Microsoft Cloud Strength Highlights Second Quarter Results,” Microsoft Corporation, January 28, 2016.)
Due to the strengths of the U.S. dollar in this reporting period, Microsoft’s results could continue to be negatively affected by exchange rate fluctuations. The company said last time that it is anticipating four points of overall FX impact in this reporting quarter—five points of impact on Productivity and Business Processes, four points on Intelligent Cloud, and three points on More Personal Computing. (Source: “Microsoft Earnings Conference Call Transcript,” Microsoft Corporation, January 28, 2016.)
Let’s not forget what an achievement Microsoft had with its “Window 10” operating system last year. In just over six months after launch, Windows 10 had been installed on more than 200 million active devices around the world. Although the update is free for “Windows 7” and “Windows 8” users, mass adoption of the new OS could bring significant monetization opportunities for Microsoft in the future. (Source: “Windows 10 Now Active on Over 200 Million Devices,” Windows Blog, January 4, 2016.)
The Bottom Line on MSFT Stock
Microsoft is scheduled to report earnings on Thursday, April 21 after the closing bell. If the company manages to deliver another earnings beat like it did in the past four quarters, the upward momentum could keep going for MSFT stock.