Tech stocks such as Microsoft (MSFT) have been one of the worst-performing groups on a year-to-date basis, punished for not only rising inflation, but also supply chain headwinds that have impacted their operating results.
Although Microsoft stock hasn’t escaped the market correction, losing 22% of its value year to date, it has held up much better than several of the FAANGs. Investors nonetheless want to know what it will take for Microsoft to rebound. That question will be answered the company when it reports fourth quarter fiscal 2022 earnings after the closing bell Tuesday. On that note, the market remains broadly bullish ahead of the earnings report, particularly for the company’s Azure cloud platform.
Citing channel checks and rising demand for Azure, Wedbush Securities analyst Dan Ives expects a 46% year-over-year increase during the just-ended quarter. "On the Azure front, cloud migration and increased focus on digital transformation is not slowing down based on our recent checks with [Microsoft] a core beneficiary of this major enterprise-driven trend," Ives wrote in a note to clients. The analyst expects that Azure growth to remain above the 40% threshold into 2023. Ives added that that roughly 44% of workloads are currently on the cloud, and he expects that total to reach 70% by 2025.
In other words, inflationary pressures and supply chain challenges aside, Microsoft still has plenty of growth runway ahead from these well-established trends. With the stock down 21% year to date, compared to a 16% decline in the S&P 500 index, Microsoft looks attractive at current levels, given Ives’ Outperform rating and $340 price target. Assuming Wall Street’s bullish thesis materializes a top and bottom line beat is in order. The company’s guidance, however, will gauge how confident the management feels about these growth projections.
For the quarter that ended June, the Redmond, Wash.-based tech giant is expected to earn $2.30 per share on revenue of $52.47 billion. This compares to the year-ago quarter when earning were $2.17 per share on $46.15 billion in revenue. For the full year, earnings are projected to rise 15% year over year to $9.31 per share, while full-year revenue of $198.87 billion would mark a year-over-year increase of 18.3%.
As impressive as the quarterly and full-year projections appear, the company’s outlook and earnings growth could be dampened due consumer and PC headwinds. The company’s cloud revenue (Azure), however, is expected to more-than offset any weak consumer-related weakness. Estimates from Bank of America calls for Azure revenue growth to come in at about 44% to 45% in the just-ended quarter. That would be a considerable jump from the third quarter when Azure cloud revenue delivered a 32% jump in revenue growth.
During the third quarter, Microsoft earned $2.22 per share on $49.4 billion in revenue, beating consensus estimates of $2.20 per share on $49.05 billion in revenue. Q3 revenue in Productivity and Business Processes was $15.8 billion, rising 17%, while revenue in Intelligent Cloud rose 26% to $19.1 billion. Just as impressive, Azure revenue not only accelerated, Azure's strong guidance for 47% growth shows no signs of slowing down. "[Our] digital technology will be the key input that fuels the world's digital output," CEO Satya Nadella said.
Not to be overlooked was the company’s strong free cash flow growth projection of between 18% and 20%. Wall Street has broadly applauded the quarter. On Tuesday the market will want to see whether Microsoft can duplicate, if not, improve on these 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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