With it status as the only publicly-traded company with a $1T market, you would be hard-pressed to find a hotter tech name than Microsoft (MSFT). Owing to its diversified business portfolio and consistent growth and earnings beats, the tech giant has again endeared itself with both value and growth investors.
Shares are trading near all-time highs and have risen nearly 35% year to date, besting the 20% rise in the S&P 500 index, suggesting Wall Street is all in on the company’s long-term growth prospects. The company is set to report fourth quarter fiscal 2019 earnings results after the closing bell Thursday. The strength of Microsoft’s Commercial Cloud business has been, and will continue to be, the catalyst for the stock’s strong return in 2019.
As such, what the software giant forecasts for its cloud service Azure will be the key factor in determining whether the Microsoft maintains its leading trillion-dollar market cap after its earnings report. In Q3 Azure revenue surged 73%, keeping its status as the company’s fastest-growing segment. Maintaining that rate of growth will be a tall order, however. On Thursday investors will want some evidence that Azure can continue to chip away at Amazon's (AMZN) lead in the public cloud market.
For the quarter that ended June, the Redmond, Wash.-based tech giant is expected to earn $1.21 per share on revenue of $32.75 billion. This compares to the year-ago quarter when earning were $1.13 per share on $30.09 billion in revenue. For the full year, earnings are projected to rise 17% year over year to $4.59 per share, while full-year revenue of $124.9 billion would mark a year-over-year increase of 13.2%.
As noted, Azure revenue surged last quarter by 73%. Can the company duplicate that levels of growth is now the main question. The company expects to generate revenue in the range of $10.85 billion to $11.05 billion in Intelligent Cloud business, which consists of Azure. This compares to Street forecast of $11.03 billion. Will those figures be enough? Nick Yako, analyst at Cowen, who has an Outperform rating and a $150 price target on the stock, is optimistic about what Microsoft will deliver.
“We expect Microsoft’s Commercial Cloud, including both Office 365 Commercial and Azure, to be the primary driver of growth going forward,” Yako said in a recent note to investors. Yako believes Azure could command 25% of the public cloud market by 2025, up from its current 19% share, and account for nearly 60% of revenue versus the current 30% of revenue.
On Thursday investors will look to see if these growth trends can continue, while dispelling fears that the cloud boom has peaked and is on the verge of decline. To the extent Microsoft can demonstrate its cloud growth can continue to accelerate into 2019 and beyond, the shares — despite trading near all-time highs — could yet be one of the better bargains in tech, reaching $160 by year’s end for an additional 18% return.
At the time of publication, the author held shares of Microsoft.