The biggest drama in tech earnings so far this season is the possibility that the cloud boom is going bust, especially after Intel Corp. revealed disappointing data center sales last week.
For Microsoft Corp.
, though, the downturn that is expected would likely cause little effect. Providers of cloud-computing power have shown no effects yet, as any downturn would be in its early stages and only affecting equipment providers far down the food chain. When Microsoft reports fiscal second-quarter earnings Wednesday afternoon, though, there could be at least one data point to test the theory.
Raymond James analysts pointed out last week that capital expenditure plans from Microsoft are typically “highly correlated” with Intel’s
outlook. For that reason, analysts at that bank expect Microsoft’s capex spending to be flat this calendar year, while consensus estimates call for an increase of 23% in this fiscal year and 10% in the 2020 fiscal year.
If the trend holds and Microsoft does pull back on its spending, it could back up Intel’s commentary that the entire data-center equipment market is slowing down. However, if Microsoft says that it expects to increase spending still, it could signal that the company is moving away from its “Wintel” partner in the cloud and looking at other chip vendors, which would just be an Intel problem and throw a small wrench in the talk of a cloud bust.
Either way, analysts appear confident that Microsoft is a safe bet at the moment because of its booming Azure cloud-computing business, a big reason why the company ended Monday with the largest valuation of any U.S. public company at more than $800 billion.
What to expect
Earnings: Analysts on average expect Microsoft to report earnings of $1.09 a share, according to FactSet, up from 96 cents a share a year ago after adjusting for effects of tax changes in the year-ago quarter. According to Estimize, which crowd sources estimates from hedge funds, academics and others, the average projection is for $1.13 a share in earnings.
Revenue: On average, analysts expect revenue of $32.44 billion, according to FactSet, up from $28.92 billion a year ago. Estimize contributors project sales of $32.62 billion.
Microsoft breaks its revenue into three segments: “Productivity and Business Solutions,” which is mostly cloud software; “Intelligent Cloud,” which includes Azure, server sales and some other products; and “More Personal Computing,” largely the legacy Windows and Xbox businesses. Analysts on average expect $10.09 billion in Productivity and Business Solutions, $9.28 billion in Intelligent Cloud, and $13.08 billion in PCs.
Stock movement: Last time Microsoft reported earnings, MarketWatch noted that it had a chance to catch Apple Inc.
and Amazon Inc.
in the race for a trillion-dollar market cap. While Microsoft is still well short of that mark, Microsoft has moved ahead of its rivals to be the most valuable company in the U.S., despite a 1.8% decline in the last three months. The S&P 500 index
has declined 0.6% in that time.
What the analysts are saying
The lovefest for Microsoft is palpable in analyst previews of the earnings report, especially when discussing Azure.
“As IT focus shifts from public crowd to hybrid cloud architectures, Microsoft rises as the best positioned firm in tech,” Morgan Stanley analysts, who have an overweight rating and $140 price target on the stock, proclaimed in a preview.
Microsoft has long sold servers to companies for on-premise compute and storage, and that accomplished business is coming in handy now that businesses are moving toward hybrid cloud, software-controlled systems that keep some data and processes on internal machines while moving others toward offerings like Azure. That is why many consider Microsoft to be the only legitimate contender to challenge Amazon Web Services in cloud.
“This two-horse race in the cloud for [Microsoft Chief Executive Satya] Nadella vs. AWS remains front and center for Microsoft in 2019 and beyond to capture market and mind share, especially with other tech stalwarts champing at the bit such as Dell/EMC
, IBM (Red Hat)
all coming at the cloud market aggressively from different angles/value propositions,” Wedbush analyst Daniel Ives wrote. He has an outperform rating on Microsoft stock with a $140 price target.
Beyond cloud, Microsoft has a wealth of software businesses and the Xbox videogame offering. Canaccord Genuity analysts, in a refreshingly honest note, said there was nothing really to worry about in those segments.
“Our checks indicate that Xbox subscriber growth should be good enough to overcome a general malaise in anything not named Fortnite. We heard nothing that suggested that [Office 365] upgrades slowed in the quarter, nor more importantly, enterprises who are still living in the past will delay the upgrade cycle. Investors should expect to hear management talk about a few wins for the firm’s emerging, gradually more integrated, CRM, LinkedIn, Outlook suite,” they wrote.
“We know of no megacap software company with so many segments moving in the right direction. This should be enough to keep the stock outperforming over the next 2+ years,” wrote the analysts, who have a buy rating on the stock but noted, “we believe Newtonian physics will keep this object in motion, which could take the stock back to the $112-$116 level within a week or so after the print.”
The area of the business that many of the analysts ignored or only lightly noted was the legacy Windows PC business, which Morgan Stanley noted could be a disappointment, after IDC and Gartner checks showed disappointing holiday sales.
One thing to watch out for is any talk of potential acquisition targets, as Microsoft has long been rumored to be in the market for assets, potentially in enterprise security or consumer software.
“We also see M&A as a potential ‘wild card’ as it relates to Microsoft’s long-term strategy around its positioning in the enterprise and consumer gaming markets,” Evercore ISI analysts wrote. They have an outperform rating and $128 price target on the stock.
In total, 30 of 34 analysts tracking Microsoft consider the stock a buy, with three rating it as a hold and only a solitary sell rating in the bunch, according to FactSet. The average price target as of Monday afternoon was $124.74, reflecting upside of 18.7% from Monday’s closing price.