Microsoft (MSFT) to Post Q2 Earnings: Is a Beat in the Cards?

We expect Microsoft CorporationMSFT to beat expectations when it reports second-quarter fiscal 2017 results on Jan 26.

Why a Likely Positive Surprise?

Our proven model shows that Microsoft is likely to beat earnings because it has the right combination of two key ingredients.

Zacks ESP : Microsoft's Earnings ESP stands at +1.28%. This is because the company's Most Accurate estimate is 79 cents, while the Zacks Consensus Estimate is pegged lower at 78 cents. A favorable ESP serves as a meaningful and leading indicator of a likely positive surprise. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Zacks Rank : Microsoft currently has a Zacks Rank #2 (Buy). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 or 3 (Hold) has a significantly higher chance of beating earnings estimates. Conversely, Sell-rated stocks (Zacks Rank #4 or 5) should never be considered going into an earnings announcement.

The combination of Microsoft's Zacks Rank #2 and +1.28% ESP makes us reasonably optimistic of an earnings beat. You can see the complete list of today's Zacks #1 Rank stocks here.

Microsoft Corp. Price and EPS Surprise

Microsoft Corp. Price and EPS Surprise | Microsoft Corp. Quote

What is Driving the Better-than-Expected Earnings?

We note that Microsoft has posted positive earnings surprise of 10.55% in the trailing four quarters. Moreover, shares have outperformed the Zacks Computer Software industry in the past six months. While the industry has posted returns of 6.5%, Microsoft shares gained 10.6% during the period.

Microsoft is benefitting from its hybrid and hyperscale cloud, which spans multiple jurisdictions, making it ideal for multinational companies and banks that have operations worldwide and are required to be in compliance with laws of the countries in which they operate.

Microsoft cites this as the primary reason behind drawing 80% of the world's largest banks to Azure. Moreover, the company's expanding cloud services have also helped it to capture big customers like Boeing, Rolls-Royce, Schneider Electric and Facebook.

Microsoft continues to expand its data center footprint. During the quarter, the company announced its plan to build data centers in France so as to provide Azure, Dynamics 365 and Office 365 services to the French populace by the beginning of 2017.

The expansion will help Microsoft to compete AMZN , which also intends to open an Amazon Web Services (AWS) Region in Paris in 2017. Moreover, strategic partnerships with the likes of Adobe have aided revenue growth of its cloud based products.

Further, we note that although worldwide IT spending declined in 2016, the rate of decline (0.6%) was much lower than previously expected. This also aided Microsoft's top-line growth.

Additionally, IT spending is forecasted to improve in 2017, with spending across data center systems segment forecasted to rise 2.6% and touch $175 billion, mainly driven by an anticipated rise of 5.6% in the global server market. This is significantly positive for Microsoft, in our view.

Microsoft is also rapidly expanding its presence in the fast emerging Internet of Things (IoT) and Artificial Intelligence (AI) market as is evident from the recent acquisition of Maluuba, an expert in the field of deep learning and reinforcement learning for question-answering and decision-making systems. Further, the company is gradually shifting its focus from being an operating system provider for automakers to run their in-car information and entertainment systems. All these initiatives are positive for the company in our view.

Other Stocks to Consider

Here are some other companies you may consider as our proven model shows they too have the right combination of elements to post an earnings beat this quarter:

Applied Optoelectronics AAOI , with an Earnings ESP of +15.87% and a Zacks Rank #1.

Applied Materials AMAT , with an Earnings ESP of +6.06% and a Zacks Rank #1.

Read our Video Article on Tech Earnings Preview Here: Will AAPL, MSFT, GOOGL, and AMZN Beat This Quarter ?

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

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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