- 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.
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.
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.