Markets

Should You Buy Microsoft (MSFT) Stock Ahead of Earnings?

Shares of Microsoft MSFT dipped on Wednesday, one day out from the release of the technology giant's quarterly financial report. This slight drop could signal that investors are worried about Microsoft, or the company could have simply fallen victim to the larger market downturn. Let's take a look at some of Microsoft's quarterly estimates and fundamentals to see what's really going on.

Microsoft stock has climbed 37% over the last year and 4% in the last four weeks. The company has also expanded its reach within new tech industries as it looks to move far beyond its traditional Office business in order to better compete with the likes of Amazon AMZN , Oracle ORCL , and Google parent Alphabet GOOGL .

These new growth areas include cloud computing and artificial intelligence. With that said, investors need to know if Microsoft's expansion is set to help or hurt the company this quarter. Furthermore, they should understand how Microsoft has performed in the past to help gauge if the stock looks like a buy ahead of earnings.

Latest Outlook & Valuation

Microsoft's quarterly revenues are expected to climb 9.1% to reach $25.71 billion, based on our current Zacks Consensus Estimates. At the other end of the income statement, Microsoft's quarterly earnings are projected to surge 16.4% to hit $0.85 per share.

Of course, top and bottom line growth estimates are just two of the many things investors will be concerned with when Microsoft reports its quarterly financial results on Thursday. We can also turn to our exclusive non-financial metrics consensus estimate file to help prepare.

The Zacks Consensus NFM file contains detailed estimate data for business segment metrics and non-financial metrics reported by companies. The data is acquired from digest and contributing broker models and includes the independent research of expert stock market analysts.

According to these consensus estimates, Microsoft's Intelligent Cloud business revenue is projected to reach $7.70 billion. This would mark a nearly 14% climb from the year-ago period when the company reported cloud revenue of $6.76 billion. Meanwhile, its More Personal Computing unit is expected to pop roughly 5% from $8.84 billion to $9.29 billion.

Lastly, Microsoft's Productivity and Business Processes unit revenue is expected to hit $8.76 billion, up 10% from the $7.96 billion the company reported in the prior-year period.

Furthermore, Heading into Wednesday, Microsoft was trading with a Forward P/E of 24.2, which marked a slight discount compared to the "Computer - Software" industry's average of 25.5.

Earnings ESP Whispers

Investors will also want to understand what chance Microsoft has to surprise investors with better-than-expected earnings results. For this, we turn to our Earnings ESP figure.

Zacks Earnings ESP (Expected Surprise Prediction) looks to find earnings surprises by focusing on the most recent analyst estimates. This is done because, generally speaking, when an analyst posts an estimate right before an earnings release, it means that they have fresh information which could potentially be more accurate than what analysts thought about a company two or three months ago.

A positive Earnings ESP paired with a Zacks Rank #3 (Hold) or better ranking helps us feel confident about the potential for an earnings beat. In fact, our 10-year backtest has revealed that this methodology has accurately produced a positive surprise 70% of the time.

Microsoft is currently a Zacks Rank #3 (Hold) and sports an Earnings ESP of 0.90%. Therefore, MSFT is a stock that could top quarterly earnings estimates.

Surprise History

Microsoft's earnings surprise history and the effect that these surprises have had on its share prices are two other important factors to consider ahead of the tech power's earnings report.

Microsoft Corporation Price, Consensus and EPS Surprise

Microsoft Corporation Price, Consensus and EPS Surprise | Microsoft Corporation Quote

We can see that Microsoft has posted strong earnings results recently, topping quarterly estimates in seven of the trailing eight periods. The company also boasts an average earnings surprise of 18% over the last four quarters.

On top of that, these beats often led to positive momentum immediately following Microsoft's quarterly earnings release.

We judge the price effect of these earnings beats by comparing the closing price of the stock two days before the report and two days after the report. Microsoft stock has turned positive in six out of these last eight windows.

Microsoft is scheduled to report its quarterly financial results after market close on Thursday.

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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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