Microsoft (MSFT) Q4 Earnings: What to Expect

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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 ways to accelerate their digital transformation in order to stay competitive.

Few companies have benefited from this shift more than Microsoft (MSFT) which has seen its shares surge almost 30% over the past six months to near all-time highs. The software giant is set to report fourth quarter fiscal 2021 earnings after the closing bell Tuesday. Sustained work and learn-from-home trends, which have driven increased demand for Microsoft services, particularly in the Intelligent Cloud segments, are expected to remain high. The strong outlook has generated tons of bullish momentum for Microsoft stock.

The company’s strong execution track record is another reason for the increased confidence. Microsoft has surpassed profit expectations dating back thirteen quarters, while missing revenue estimates only once. As such, Wall Street remains broadly positive about the company’s prospects to achieve double-digit revenue growth in fiscal 2021, particularly given the strong growth rate within its Azure cloud platform which in 2021 is expected to surpass Amazon’s (AMZN) AWS. This raises the question whether all of this good news is priced in for Microsoft.

Microsoft on Tuesday must deliver not only robust business segment results, but also better-than-expected guidance. Investors will also listen for comments regarding the the company's recently announced $19.7 billion all-cash deal for Nuance Communications (NUAN). The deal values Nuance at a 23% premium. Nuance's cloud and AI software is the key appeal in this deal. That, and other positive updates will be needed on Tuesday to keep the stock rally going.

For the quarter that ended June, the Redmond, Wash.-based tech giant is expected to earn $1.77 per share on revenue of $41.03 billion. This compares to the year-ago quarter when earning were $1.40 per share on $35.02 billion in revenue. For the full year, ending June, earnings are projected to rise 33% year over year to $7.77 per share, while full-year revenue of $166.18 billion would mark a year-over-year increase of 16.2%.

The strength of Microsoft’s Commercial Cloud business has been, and will continue to be the catalyst for the stock’s strong performance. In the third quarter, the company delivered revenue growth of nearly 19% — its was Microsoft’s highest growth rate in almost three years. Third quarter EPS of $1.95 per share surpassed Street estimates by a whopping 17 cents which underscored the improvements the company continues to make in gross margins.

Microsoft's intelligent cloud segment posted revenues of $15.1 billion, rising 20% year over year and 7% above the company's guidance. Driven by the strong growth of Office Commercial products and cloud revenue, Microsoft posted a 12% rise in Productivity and Business revenue tp $13.6 billion, above consensus of $13.51 billion. Office commercial products and cloud services increased 10% aided by the strength of Office 365 strength.

All told, when factoring the 31% rise in operating income to $17 billion, Microsoft continues to demonstrate not only exceptional operating efficiency, but also tremendous operating leverage which suggests the stock might be cheap despite trading near all-time highs. But for the stock to keep powering higher, Microsoft on Tuesday must provide strong guidance for the next quarter and fiscal year.

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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