Microsoft Earnings After The Bell Thursday: Is The Cloud The Holy Grail?

The largest company in the world by market cap is reporting earnings tomorrow after the bell in one of the most anticipated Q2 releases. Microsoft MSFT analysts have enormous expectations for this June quarter results, estimating an EPS of $1.21 and revenues of $32.73 billion. These estimates would represent record sales and earnings for the company.

The firm has seen 34% growth so far this year pushing its market cap past one trillion, outperforming the S&P 500 by more than 11 percentage points. Sell-side analysts have been raising earnings estimates over the past 3 months, driving this stock into a Zacks Rank #2 (Buy).

Microsoft has transitioned its top-line to one that is primarily subscription-based, a business model that is being utilized across the tech sector. Their primary revenue drivers are subscriptions-based Microsoft Office, Microsoft Windows as well as on-premise server products, but cloud computing is ostensibly the future of this firm.

The Cloud

Microsoft’s new cloud computing technology, Azure has investors in a frenzy attempting to value this proliferating segment. Since Azure was initially launched back in 2011 this company’s forward P/E has more than doubled as investors value the potential of this new technology.

Corporations across the world are quickly shifting from on-premise servers to the less costly and more easily accessible cloud-based ones. Amazon’s AWS launched 13 years ago and has proven the cloud computing business model. Today AWS makes up more than 50% of this close trillion-dollar online retailer’s profits.

Azure has seen triple-digit to high double-digit growth figures since it gained traction back in 2015. These growth rates far outpace that of AWS and Azure is quickly taking market share. The main concern that investors have with this segment is its ability to turn a profit. Even though Azure was able to produce sales of $7 billion in 2018, it is still lost $1.7 billion, according to Jefferies. At this stage in AWS progression, it had already attained operating profit margins north of 20%. Table below is provided by Wells Fargo Securities.

As Azure scales, the margins should expand, but the competition in the space is a concern. The cloud computing sector is becoming increasingly saturated. Competitive pricing is likely going to pinch margins in the future. Competitors include Salesforce CRM, Adobe ADBE, and previously discussed Amazon AMZN

Take Away

Microsoft analysts have enormous expectations for tomorrow’s earnings report. This trillion-dollar company doesn’t typically have big moves on earnings, but over the last 12 quarterly reports the stock has had a positive price action on 11 of them.

Keep an eye on management guidance for how they expect the competitive cloud computing landscape to playout in the coming quarters. One of the critical line items I would focus on is the Intelligent Cloud segment, which includes Azure, their anticipated primary revenue driver moving forward. This segment is expected to produce $11 billion in sales for Q2. Margins expansion is also a very important metric to monitor.

 

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