Microsoft reports fiscal-second-quarter earnings after the close on Tuesday, and the Street sees potential for better-than-expected results amid continued strong demand for both cloud services and personal computers.
Microsoft (ticker: MSFT) no longer provides specific revenue and profit guidance, but it does offer an outlook each quarter for its three major business segments. On the last quarterly earnings call, Chief Financial Officer Amy Hood projected December quarter sales of $12.75 billion to $13 billion for the Productivity and Business Processes segment (which includes Office and LinkedIn); $13.55 billion to $13.8 billion in Intelligent Cloud (including Azure); and $13.2 billion to $13.6 billion for More Personal Computing (including Windows).
At the top, the range for each of the three segments, revenue would be $40.4 billion. The Wall Street analyst consensus calls for revenue of $40.2 billion, up 9%, with per-share profits of $1.64. For the March quarter, the Street consensus calls for revenue of $38.7 billion and profits of $1.58 a share.
Wedbush analyst Dan Ives over the weekend reiterated his Outperform rating on Microsoft stock while lifting his target price to $270 from $260. He thinks Microsoft will post a “beat and raise special,” driven by strong demand for the company’s Azure cloud service.
Ives thinks Microsoft is narrowing Amazon’s lead in the public cloud sector. And he contends that from a valuation basis, the Microsoft cloud business is worth $1 trillion. (The company’s current market cap is $1.7 trillion.) He raises his new bull-case target to $300, up from $275.
Cowen analyst J. Derrick Wood late last week reiterated his Outperform rating and $245 target on Microsoft shares. He’s projecting “solid results” for the quarter, despite what he considers difficult comparisons in both Azure and server software. Wood thinks the setup for Microsoft shares gets better from here as economic conditions improve as the pandemic eventually fades.
“Microsoft shares have lagged behind over the past several months,” he notes, as have other large-cap-software stocks such as Salesforce.com, Adobe, ServiceNow, and Workday. “While this quarter may not be a meaningful catalyst for the stock, we see calendar 2021 as a compelling set up for [the stock] especially as sentiment seems more muted.”
Last week, Evercore ISI analyst Kirk Materne repeated his Outperform rating on Microsoft stock, raising his target to $260 from $250. He also added it to the firm’s “tactical outperform list,” implying there is potential for an upside move in Microsoft stock in the near term. He contends that the risk/reward on Microsoft shares look “increasingly attractive.” Materne wrote that he has “growing confidence in an improving IT spending backdrop for 2021,” and sees potential for upside earnings revisions for the second half of June 2021 fiscal year after the company reports results.
Citi’s Walter Pritchard, who has an Outperform rating and a $272 price target on Microsoft stock, wrote last week that he sees a “positive setup around key top-line metrics” for the company’s December quarter, with upside likely for the Azure cloud business. Pritchard says that continued recovery in IT spending should drive results in all three segments above Street estimates and guidance.
After a 42% rally in 2020, Microsoft stock is up 2.4% so far in 2021, including a 0.9% rise in Monday trading to $227.85.
What to expect?
Earnings: Of the 28 analysts surveyed by FactSet, Microsoft on average is expected to post earnings of $1.64 a share, up from the $1.61 a share expected at the beginning of the quarter and the $1.51 a share reported in the year-ago second quarter. Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts, and others calls for earnings of $1.74 a share.
Revenue: Wall Street expects revenue of $40.23 billion from Microsoft, according to 25 analysts polled by FactSet. That is down from the $40.48 billion forecasts at the beginning of the quarter, but up from the $36.91 billion reported in the year-ago quarter. Estimize expects revenue of $40.78 billion.
Stock movement: Over the December-ending quarter, Microsoft shares rose 5.8%, compared with a 10.2% rise on the Dow Jones Industrial Average, which includes Microsoft as a component.
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