Microsoft's (MSFT) Q1 Earnings to Benefit From Azure Growth

Microsoft CorpMSFT is set to report first-quarter fiscal 2018 results on Oct 26.

Notably, the company has a record of positive earnings surprises in the trailing four quarters, with an average beat of 15.16%. Last quarter, the company delivered a positive earnings surprise of 38.30%.

Azure - Key Catalyst

Microsoft's cloud computing service - Azure - has been the major growth driver in recent times. In the last quarter, Azure revenues soared 94% at constant currency on a year-over-year basis. We believe that robust adoption of Azure will continue to drive Microsoft's top line in the soon-to-be reported quarter.

According to data from Synergy Research, Azure trailed only Amazon Web Services (AWS) in terms of market share and revenue growth in the cloud infrastructure services market.

Moreover, Microsoft now leads the enterprise SaaS market that gained almost 31% year over year to reach $15 billion in quarterly revenues. The outperformance was attributed to the buyout of LinkedIn that contributed revenues of $1.1 billion in the last quarter. Microsoft expects approximately $1.1 billion of revenues from LinkedIn in first-quarter 2018.

Nevertheless, we believe that increasing competition from the likes of Alphabet Inc GOOGL , IBM, and Oracle threatens growth opportunities for Azure, which can hurt results.

For the first quarter, Microsoft expects Intelligent Cloud revenues (Azure falls under this segment) between $6.9 and $7.1 billion. The company anticipates another quarter of double-digit revenue growth across server products and cloud services.

The Zacks Consensus Estimate for revenues for the Intelligent Cloud segment is currently pegged at $6.78 billion.

Microsoft Corporation Price and EPS Surprise

Microsoft Corporation Price and EPS Surprise | Microsoft Corporation Quote

Office 365, Windows 10 Adoption - Other Key Factors

We note that strong Office 365 and Windows 10 adoption are other growth drivers. The launch of a plethora of products - Microsoft Teams in Office 365 for Education, Microsoft 365, Microsoft Relationship Sales solution and ISV Cloud Embed - is expected to drive installed base. Moreover, Microsoft continues to add features to Windows 10 that makes it more attractive for consumers as well as enterprises.

Productivity and Business Processes revenues are expected between $8.1 and $8.3 billion. Microsoft expects Office 365 commercial revenue growth to be driven by installed base growth, ARPU expansion and adoption of premium services like E5.

In our view, the collaboration between Microsoft's Cortana and Inc's AMZN Alexa presents significant growth opportunity for the company.

The Zacks Consensus Estimate for revenues for the Productivity and Business Processes segment is currently pegged at $2.87 billion.

What Our Model Says

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or #3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP . The Sell-rated stocks (Zacks Rank #4 or 5) are best avoided.

Microsoft has a Zacks Rank #3 and an Earnings ESP of -1.71%, which indicates an unlikely positive surprise. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Stock to Consider

Here is a stock you may consider as our proven model shows that it has the right combination of elements to post an earnings beat this quarter:

NVIDIA Corporation NVDA has an Earnings ESP of +1.06% and sports a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank stocks here.

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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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