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Microsoft Earnings Preview: What’s in the Offing?

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Microsoft (MSFT) is scheduled to report fiscal fourth-quarter 2021 earnings on July 27 after the market close.

Over the past year, shares of the software maker have jumped 32.9%, trading at over $281. Solid Q4 results might propel the stock price upward, so let’s take a closer look at what analysts on the Street are expecting.

Fiscal Q4 Expectations

For fiscal Q4, the Street expects Microsoft to report adjusted EPS of $1.90 and revenues of $44.1 billion.

Meanwhile, the Earnings Whisper number, or the Street’s unofficial view on earnings, stands at $2.00 per share. (See MSFT stock charts on TipRanks)

For the fiscal fourth quarter of 2021, Microsoft has provided segmental revenue forecasts. The Productivity and Business Processes unit is expected to report revenue in the range of $13.8 – $14.05 billion, while Intelligent Cloud revenue is forecast to land between $16.2 billion and $16.45 billion. Additionally, More Personal Computing revenue will come in between $13.6 billion and $14 billion.

Prior Quarter Snapshot

In the last-reported fiscal third quarter, revenues came in at $41.7 billion, which increased 19% year-over-year and outpaced the Street’s estimates of $41.03 billion, fueled by a 33% rise in commercial cloud revenue.

Meanwhile, adjusted earnings increased 39% year-over-year to $1.95 per share, which surpassed the Street’s estimates of $1.78.

Factors to Note

Ongoing momentum in Azure, strong adoption of Microsoft Teams, and strength in its gaming segment are expected to have generated strong numbers for the software giant in the upcoming quarter.

Coming to Microsoft’s cloud computing platform – Azure: With the rise of digitalization, computing is becoming increasingly pervasive and decentralized, so Microsoft is making constant efforts to address organizations’ needs in a multi-cloud world.

To address the increasing needs, the company has expanded its cloud availability zones to many new regions, including China, Indonesia, Malaysia, as well as the United States. Also, momentum in the Azure Communications Services platform, which was launched during the fiscal first quarter, is expected to have driven growth. Besides these, increasing strategic partnerships with companies like Fujitsu and KPMG remain noteworthy.

These initiatives to strengthen cloud-based capabilities and help enterprises accelerate the digital transformation for clients bodes well. The company’s strength in the Azure Kubernetes Services (AKS) offering on Azure Stack HCI to support containerized applications at scale may have acted as a tailwind.

Markedly, Azure revenues surged 46% year-over-year on a constant currency basis in the last reported quarter. The momentum is likely to have continued in the upcoming quarter owing to solid uptake in cloud computing solutions and digital transformation.

Continued strength in the consumption of cloud services is likely to be reflected in Azure’s upcoming quarterly revenues.

Microsoft’s workspace communication offering – Teams: Adoption in this space has witnessed a robust surge in usage, driven by coronavirus-induced video conferencing demand led by the work-from-home, stay-at-home, and online learning waves.

Microsoft continues to introduce new features to the Teams app in order to improve workplace collaboration and grow the user base.

With regards to this, Microsoft added “Dynamic View” to its Meetings and Webinars feature. The new functionality helps to dynamically rearrange the layout every time an individual participant begins to provide his input at the meeting.

Microsoft’s several in-house offerings like PowerPoint presentations, SharePoint, and Dynamics 365 are also integrated with the Teams app. This makes Teams an appealing platform for users since it makes collaboration fun while also generating corporate results.

Given these developments, Microsoft’s Teams app subscriber base is expected to have gained robust traction in the enterprise communication market in the upcoming quarter.

Gaming Segment: Another growth area which investors could look into is Microsoft’s gaming segment. The company has undertaken enormous efforts to bolster its position in the video games market, which has seen a massive spurt owing to the COVID-19 crisis and resultant shelter-in-place restrictions.

Just last month, the company announced an impressive games lineup for its Xbox consoles. The video game giant showcased 30 new titles, including Forza Horizon 5 and Battlefield 2042. Out of these 30 titles, 27 will be available with the Xbox Game Pass service.

Markedly, the company is adding more perks and services to its Game Pass and Game Pass Ultimate subscription services to grab a larger share of the lucrative video games market. Subscription services ensure a stable and recurring revenue stream. The company’s Game Pass subscription service launched in 2017 has been a massive success, with more than 23 million users as of April 20, 2021.

The company is anticipated to have gained from an increase in Xbox Live monthly active users and the adoption of Game Pass subscriptions in the upcoming quarter.

In the last earnings call, Microsoft CEO Satya Nadella sounded optimistic about the company’s prospects amid the accelerated global digital transformation.

Nadella stated, “Over a year into the pandemic, digital adoption curves aren’t slowing down. In fact, they’re accelerating and it’s just the beginning.”

Analyst Recommendations

Ahead of the fiscal fourth-quarter earnings announcement, Rosenblatt Securities analyst John McPeake reiterated a Buy rating on the stock and increased the price target to $333 from $301. This implies 18.3% upside potential to current levels.

McPeake stated, “As we move into FY22, we think Microsoft’s fundamentals are likely as strong at any point in recent history.”

He further added, “We think Azure continues to take share, demand for PCs remains robust, and Office, Teams, and Dynamics likely continue to grow in the double digits.”

Another analyst, Daniel Ives of Wedbush, reiterated a Buy rating on the stock with a price target of $325 (15.5% upside potential).      

Ives commented, “Microsoft remains our favorite large cap cloud play and we believe the stock will start to move higher over the coming quarters as the Street further appreciates the cloud transformation story in Redmond.”

Consensus among analysts is a Strong Buy based on 25 unanimous Buys. The average MSFT price target of $304.43 implies 8.2% upside potential from current levels.

Microsoft scores a “Perfect 10” from TipRanks’ Smart Score rating system, indicating that the stock has strong potential to outperform market expectations.

Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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