Without question, tech stocks such as Microsoft (MSFT) have been one of the worst-performing groups on a year-to-date basis. Supply chain issues and rising inflation has been part of the reason that many former high-flyers continue to underperform to the overall market. But for Microsoft, a case can be made it is being unfairly treated. Does that matter?
That question will be answered the company when it reports third quarter fiscal 2022 earnings after the closing bell Tuesday. Despite beating earnings estimates in the past six quarters, Microsoft stock has lagged its tech peer group such as the FAANGs. The stock is down some 18% year to date, trailing the 8% slide in the S&P 500 index. Investors want to know what it will take for it to rebound. The company’s cloud revenue (Azure) continues to be a key growth driver for Microsoft, which rose 32% last quarter to reach $22 billion.
Gross margins for its cloud services increased 21% last quarter to $2.3 billion, thanks to growth in Azure and other cloud services. The company’s gaming revenue will also be closely watched. Fresh from its $69 billion, the all-cash deal for video game giant Activision Blizzard (ATVI), Microsoft is clearly making a play for the metaverse. The all-cash deal is not cheap. But the deal gives Microsoft a massive ramp in the mobile gaming industry, among other advantages in building its metaverse.
Wall Street has broadly applauded the deal, which many expects to receive little regulatory challenges. Overall, Microsoft is poised to benefit from these well-established trends in both cloud and video game segments. Still, investors will want to know the potential revenue and earnings growth the management expects from this deal. And in what timeframe? If Microsoft can answer these key questions, which I believe it will, it is still unknown how the stock will respond.
For the quarter that ended March, the Redmond, Wash.-based tech giant is expected to earn $2.18 per share on revenue of $49.03 billion. This compares to the year-ago quarter when earning were $1.95 per share on $41.71 billion in revenue. For the full year, ending June, earnings are projected to rise 15.5% year over year to $9.33 per share, while full-year revenue of $199.01 billion would mark a year-over-year increase of 18.4%.
Goldman Sachs analyst Kash Rangan has Microsoft on his Conviction Buy List with a $400 target, representing more than 45% upside from current levels of around $275. That target could be a bit conservative with Activision coming into the fold. In the second quarter, revenue from Microsoft’s gaming services rose 8%, thanks to the launch of its Xbox Series X|S and stay-at-home orders. Microsoft has since announced plans to publish all Activision games onto its Xbox Game Pass — a service that currently has 25 million subscribers who are paying $9.99 per month.
This is poised to boost Microsoft’s gaming revenue, given that Activision’s gaming library already has over 400 million monthly active players. The gaming industry is expected to be the largest and fastest growing entertainment market globally, according to many analysts. Until then, Microsoft’s cloud business remains the breadwinner segment. In Q2 Azure revenue rose 46% year over year, Microsoft revenue from Productivity and Business Processes was $15.9 billion, up 19% year-over-year, driven by Office 365, which now has 56.4 million subscribers.
Just as impressive, revenue from Intelligent Cloud surged 26% year over year to $18.3 billion, while More Personal Computing, which includes Windows, rose 15% year-over-year to $17.5 billion. On Tuesday investors should expect Microsoft to produce similar-to-higher results.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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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