Microsoft (MSFT) Q2 Earnings: What to Expect

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Microsoft (MSFT) has announced its Metaverse presence with some authority with its announced deal for video game giant Activision Blizzard (ATVI). Paying almost $69 billion, the all-cash deal is not cheap. But it is one that the company had to make to strengthen its grip in building its metaverse. Not only that, Activision also gives Microsoft a massive ramp in the mobile gaming industry, among other things.

How did this deal come about? What are the potential revenue and earnings growth the management expects from this deal? And in what timeframe? Those are just some of the few questions the company will be asked on the conference call when it reports second quarter fiscal 2022 earnings after the closing bell Tuesday. Given the various reports and opinions we have seen, it is clear that Wall Street broadly applauds the deal, which many expect to receive little regulatory challenges.

Goldman Sachs analyst Kash Rangan has Microsoft on his Conviction Buy List with a $400 target, representing more than 30% upside from current levels. "As Activision has built a number of best in class franchises (Call of Duty, World of Warcraft, Diablo and Candy Crush) and engages millions of users (its mobile segment, King has 245m MAU), Microsoft stated that it sees opportunities to be a key player in the future metaverse era," Rangan wrote in a note to clients. Needless to say, this will be a major topic on the earnings call with analysts on Tuesday. Microsoft must also not only deliver goods on its current business segments, but also better-than-expected guidance.

For the quarter that ended December, the Redmond, Wash.-based tech giant is expected to earn $2.31 per share on revenue of $50.88 billion. This compares to the year-ago quarter when earning were $2.03 per share on $43.08 billion in revenue. For the full year, ending June, earnings are projected to rise 14% year over year to $9.22 per share, while full-year revenue of $194.34 billion would mark a year-over-year increase of 17.2%.

There is no question that tech stocks, particularly software names, have powered the market higher since the March 2020 bottom. The shift to remote work has forced corporations to increase spending not only on cloud computing, but also on accelerating their digital transformation in order to stay competitive. Few companies have benefited from this shift more than Microsoft which, prior to the recent decline in tech, had seen its shares surge to all-time highs. Sustained work and learn-from-home trends continue to drive increased demand for Microsoft services, particularly its cloud segment.

While there is little doubt that the company can maintain its strong cloud position, the metaverse is now the real question mark. At least it was a question prior to the Activision deal. Mark Shmulik, internet analyst at Bernstein, recently said the metaverse is likely to be "really big," with a combined annual run-rate of most markets at $2 trillion and growing. Analysts at Jefferies have called the metaverse a "new platform for the digital age." Adding, the metaverse will be the "biggest disruption humans have ever experienced.” Microsoft wants to establish a lead.

The gaming industry is expected to be the largest and fastest growing entertainment market globally, according to many analysts. Assuming the metaverse becomes the $2 trillion opportunity it is currently projected to be, scooping up Activision today — despite the significant price tag — may prove to be one of the best M&A deals in the years ahead. Investors who are looking to capitalize on the metaverse now have a strong and capable horse in the race.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Richard Saintvilus

After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.

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