Microsoft Earnings Preview: Buy MSFT Stock On Cloud Computing Growth?

Microsoft (NASDAQ:MSFT) stock has moved somewhat sideways over the last three months as it cools off after a stellar first half of 2019. This means that the tech giant’s upcoming quarterly earnings results will likely be the next catalyst for MSFT shares.

Quick MSFT Rundown

Microsoft still relies heavily on its legacy Windows and Office businesses, which have expanded and evolved. The Redmond, Washington-based firm has also continued to grow its gaming unit, along with consumer products such as Surface laptop and tablets.

MSFT, like most technology titans, has also grown through acquisitions. This includes its 2016 purchase of business-focused social media platform LinkedIn (NYSE:LNKD), which saw its revenue jump 25% last quarter. Microsoft in June 2018 also acquired open-source software power GitHub, as part of well over a dozen acquisitions in the last two years alone.

On top of all of this, Wall Street and investors have fallen in love with Microsoft’s cloud computing expansion. Microsoft is the industry’s second-largest player, ahead of the likes of Google (NASDAQ:GOOG) , (NASDAQ:GOOG) and behind only Amazon (NASDAQ:AMZN) .

Plus, unlike many growth-minded tech companies, MSFT currently pays an annualized dividend of $1.84 per share, for a 1.31% yield—the10-year U.S. Treasury note sits at 1.75%. And in September, the company announced that it will raise its quarterly dividend by 11% this year and begin a new $40 billion share repurchase program.

Price & Valuation

We can see in the chart above how strong MSFT stock has been over the last three years, up 143%. This tops Amazon’s 120% jump, Apple’s (NASDAQ:AAPL) 100%, and blows away Facebook’s (NASDAQ:FB) 48%.

As we alluded to at the outset, the firm has also seen its stock price surge 38% in 2019, compared to its industry’s 17% average climb. Microsoft closed regular trading Thursday at $139.69 per share, down about 2% from its 52-week highs.

Despite MSFT’s strong run, Microsoft is trading at 25.8X forward 12-month Zacks Consensus earnings estimates, which still represents a discount compared to its industry’s 27.5X average. More importantly, MSFT has traded as high as 30X over the last year, with a two-year median of 25.8X.

Q1 Outlook & Beyond

Moving on, our Zacks Consensus Estimates call for MSFT’s Q1 fiscal 2020 revenue to jump 10.8% to $32.23 billion. Investors should note that this comes on top of the year-ago period’s 19% growth and would fall just below Q4 FY19’s 12% expansion.

Overall, the firm’s fiscal 2020 sales are projected to climb 10.7%, with fiscal 2021 expected to jump 11% higher to hit $154.60 billion. These full-year estimates would mark a slowdown compared to 2019 and 2018’s 14% sales growth. But the company’s 2020 and 2021 revenue estimates blow away 2017’s 6% climb, 2016’s 2.6% downturn, and 2015’s 7.8% jump.

At the bottom end of the income statement, MSFT’s adjusted quarterly earnings are projected to pop 9.7% to reach $1.25 per share. Last quarter, the company’s earnings jumped 21% to easily top our quarterly estimate. The tech power’s FY20 EPS figure is then expected to pop 10.3%, with 2021 projected to come in 12.8% higher.

Cloud Computing

Along with the company’s sales and earnings estimates, it is important to look at what to expect from its cloud computing unit as Wall Street will continue to watch the segment closely. To do this, we will utilize our Key Company Metrics estimates.

Microsoft’s Intelligent Cloud, which is highlighted by Azure, is projected to jump 20.5% from $8.567 billion in the year-ago period to reach $10.326 billion. This would top last quarter’s 18.5% Intelligent Cloud growth and comes on top of Q1 2019’s nearly 24% growth.

Peeking further down the road, Microsoft’s full-year fiscal 2020 Intelligent Cloud revenue is projected to surge 18.1% from $38.985 in 2019 to 46.037 billion. This would fall short of Intelligent Cloud’s 21% growth in 2019. However, investors should be pleased to note that this would top 2018’s 17.6% expansion and crush 2017’s 9.6%.

Bottom Line

Clearly, we don’t know how Wall Street will react and MSFT could fall short of our cloud computing estimates. But it seems that the continued growth of the company’s key growth driver might help provide for a solid post-earnings release boost.

Intelligent Cloud is set to account for roughly 33% of the company’s total revenue. Still, the company’s other two units, Productivity and Business Processes and More Personal Computing, have also performed well recently.

Microsoft’s is Zacks Rank #3 (Hold) at the moment that boasts “A” grades for both Growth and Momentum in our Style Scores system to help it earn an overall “A” VGM score. MSFT almost never misses bottom-line estimates and it has topped our quarterly projections by an average of 11.7% over the trailing four quarters.

Therefore, those who can handle the inherent risks of buying stocks around earnings might want to consider Microsoft, which certainly looks like a strong long-term play. MSFT is set to release its Q1 fiscal 2020 results on Wednesday, October 23 (also read: Solid Start to Q3 Earnings Season).

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