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Microsoft Earnings Preview: Recent Acquisitions To Drive Future Growth 

By Investing.com (Haris Anwar/Investing.com)Stock MarketsJan 25, 2022 09:31AM ET
www.investing.com/analysis/microsoft-earnings-preview-recent-acquisitions-to-drive-future-growth-200615760
Microsoft Earnings Preview: Recent Acquisitions To Drive Future Growth 
By Investing.com (Haris Anwar/Investing.com)   |  Jan 25, 2022 09:31AM ET
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  • Reports Q2 2022 results on Tuesday, Jan. 25, after the market close
  • Revenue Expectation: $50.65 billion
  • EPS Expectation: $2.31

Investors are likely to see a familiar growth pattern when Microsoft (NASDAQ:MSFT) releases its latest earnings report after the Wall Street close later today—the tech giant’s cloud-based software will have fueled robust sales and profit expansion.

The Redmond, Washington-based company's quarterly results have topped analysts’ earnings estimates over the last 11 straight quarters, showcasing the success of Chief Executive Officer Satya Nadella’s strategy to focus on cloud computing, which provides data storage and runs applications for corporations.

In Microsoft’s most recent earnings report in October, sales of Azure and other cloud services increased 50%, just shy of the 51% rate in the prior quarter. Microsoft is making around 70% gross margins on cloud sales to businesses, a number that many Wall Street executives can only dream of.

MSFT Weekly Chart
MSFT Weekly Chart

Microsoft shares rose more than 50% last year, the stock's 10th straight year of positive returns, as well as its ninth straight year providing a double-digit advance.

Still, over the short run, Microsoft and other high-growth stocks are under pressure as rising interest rates reduce their investment appeal. In 2022, MSFT shares are down about 12%, in line with the general sell-off in technology stocks.

Revenue from Office 365 to business customers rose 23% in the company’s fiscal 2022 first quarter, helped by the software's advanced features. Clearly, in addition to the cloud segment where Microsoft competes with Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL), sales of the company’s legacy businesses are also expanding.

Profitability from these services is expected to expand further as the company implements price hikes. The cost of one type of subscription, the premium Office 365 E5, is increasing by 9% per user per month starting Mar. 1, while the price of the more affordable Office 365 E1 will go up by 25%.

Commercial subscriptions to Office 365 represented about 18% of Microsoft’s revenue in the fiscal year that ended June 30. According to analysts’ estimates, the move will add $5 billion to the company’s revenue by 2022.

Acquisition Spree

Loaded with cash and earnings momentum, Microsoft is setting the stage for future growth by aggressively buying companies that can improve its already strong competitive edge and offerings. In one such move this month, the company agreed to buy Activision Blizzard (NASDAQ:ATVI) in an all-cash deal valued at about $75 billion, its largest acquisition so far, to further expand its videogame business.

This deal, expected to close next year, will help expand Microsoft’s Xbox console appeal and push it into the fast-growing markets for mobile gaming and the metaverse, making Microsoft the world’s No. 3 gaming company.

According to FactSet, analysts estimate that Activision’s sales in 2021 totaled $8.7 billion, while Microsoft reported $15.4 billion in gaming revenue for the fiscal year through June, accounting for about 9% of its total sales.

Last year, Microsoft made its second-largest acquisition, spending $16 billion for artificial intelligence company Nuance Communications (NASDAQ:NUAN), to capture growth in the healthcare market.

These growth initiatives, combined with the company’s leading position in the cloud segment, make Microsoft an ideal candidate for long-term investors. Indeed, the majority of analysts surveyed assigned a buy rating to MSFT.

MSFT Consensus Estimates
MSFT Consensus Estimates

Chart: Investing.com

Of 45 analysts polled by Investing.com who cover Microsoft, 42 have an outperform rating on the stock, with the average 12-month price target or $368.52 implying 24% upside potential.

Bottom Line

Microsoft’s earnings release later today will likely show that the company remains in a strong growth phase, helped by its cloud computing business. The stock’s current weak spell offers a good buying opportunity for long-term investors.

Microsoft Earnings Preview: Recent Acquisitions To Drive Future Growth 
 

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Microsoft Earnings Preview: Recent Acquisitions To Drive Future Growth 

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Comments (7)
Khulekani Christian Mjwara
Khulekani Christian Mjwara Jan 25, 2022 2:52PM ET
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I thought the acquisition of Activision Blizzard was worth $68.5 billion.
Moyosola Aina
Moyosola Aina Jan 25, 2022 2:12PM ET
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I still think msft is overpriced
Solomon Okorefe
Solomon Okorefe Jan 25, 2022 2:12PM ET
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pls can you explain this business
Solomon Okorefe
Solomon Okorefe Jan 25, 2022 2:12PM ET
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I'm a new commer
Md Mehedi
Md Mehedi Jan 25, 2022 2:11PM ET
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Md Mahadi
David Addo
David Addo Jan 25, 2022 11:55AM ET
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At what exact time will the earnings be release please?
Khulekani Christian Mjwara
Khulekani Christian Mjwara Jan 25, 2022 11:55AM ET
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5:30pm EST
Stanley Lu
Stanley Lu Jan 25, 2022 11:34AM ET
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very details report, but a bit optimistic
Mohd Izhar Muslim
Mohd Izhar Muslim Jan 25, 2022 4:18AM ET
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Thanks for the article 👍
Miss Cinndy
Miss Cinndy Jan 25, 2022 3:33AM ET
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hello
 
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