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Sound fundamentals and strong earnings show could push Microsoft Corporation stock to new all-time highs.
Redmond, Washington-based tech power horse Microsoft (NASDAQ:MSFT) has a sort of made a comeback into the good books of investors and market experts of late with good double-digit returns over the last few years. Though MSFT stock still lacks the excitement as that of the 'FAANG' stocks, it has received backing from some sections of the Wall Street to soon hit the psychologically important milestone of $1 trillion market capitalization. Microsoft's transformation into a leading player in Cloud market under Satya Nadella's leadership is seen as the primary driver of the stock's fortunes in the coming days. With Microsoft set to report its fiscal 2018 third-quarter results on April 26th, 2018 after the market closes, all eyes would be on its cloud business to deliver once again. The question now is, can earnings propel Microsoft stock to new all-time highs?
Microsoft Earnings Estimates.
Wall Street consensus expects Microsoft to report earnings of $0.85 per share on a revenue of $25.77 billion. The current estimate implies a 21.42% YoY growth in earnings and a 9.4% YoY growth in topline. While the 9.4% top-line growth might not seem like much, that's near the higher end of last five quarters revenue growth rate for Microsoft. The 21.42% YoY growth in earnings will be the second best growth rate in the earnings growth numbers posted by Microsoft over the last 5 quarters. In other words, while the EPS and revenue growth seems to be low, investors should remember the scale at which the company operates and also the fact that earnings/revenue growth now seems to be accelerating with the company's Cloud business booming. The management has guided for revenue in the range of $25.25 to $25.95 billion.
Productivity and Business Processes, Intelligent Cloud segments to be in the focus again.
The Productivity and Business Processes and Intelligent Cloud segments are expected to generate a revenue of $8.6-$8.8 billions and $7.55-$7.75 billion respectively, nearly two-thirds of the total revenue. Office 365 and LinkedIn again would be the key factors to drive the growth in Productivity segment. Linkedin is expected to grow its revenues by 20%YoY to $1.2 billion. The Intelligent Cloud segment is driven by its commercial cloud product Azure which is showing no signs of slowing down continuing its high double-digit growth. In this quarter, the server products revenue is also expected to return to double-digit revenue growth.
New growth drivers to boost Productivity and Cloud segments.
The Productivity and Cloud segments are all set to be the growth drivers for next few coming quarters as well with Microsoft's leadership in enterprise collaboration and cloud IoT platforms. According to Synergy Research Group, Microsoft is just narrowly behind Cisco (NASDAQ:CSCO) in the booming enterprise collaboration software market. The enterprise collaboration market is expected to reach $49.51 billion by 2021, at an estimated Compound Annual Growth Rate (CAGR) of 13.2%. Microsoft has slowly closed the difference between the market leader Cisco to less than a single percentage point in 2017 Q4. Satya Nadella led company has a strong lead in hosted/cloud collaboration market but here the market 'is more fragmented with no single supplier achieving a double-digit market share.'
The other big plus point for Microsoft is that its Azure platform is becoming quite popular among developers for IoT cloud platform. It has climbed to the second spot displacing Alphabet (NASDAQ:GOOGL) Google cloud platform and behind market leader Amazon (NASDAQ:AMZN) AWS. As per a recent survey, 31.2% of developers cited Azure as their IoT cloud platform. With IoT being touted as one of the next big things in technology with, investments growing exponentially, this trend augurs well for the Redmond based company.Microsoft is also betting big on IoT with an investment of more than $5 billion over the next 4 years.
Microsoft stock still a very much safe bet.
The 41% gains in the last one year have raised some valuation concerns around Microsoft stock, with the stock trading at 24.32x its forward earnings, which is very close to its 5-year average of 26.25. Its present adjusted PE of 29.21 is also above its 5-year average. However, we have addressed this valuation concern in detail in our previous post, and we believe now the company now has lower risks and better growth prospect. Further, the strong balance sheet and the healthy dividend yield make a strong case for Microsoft stock. MSFT stock has a healthy dividend yield of 1.76% and has a good track record of annual dividend increases. The Cloud focus along with sound fundamentals make MSFT stock a great dividend + growth play now.
Though the competition is intense in the Cloud industry, Microsoft has been successful in creating a strong impression among the big enterprises who were initially hesitant to move to cloud solutions. All in all, investors should make the best use of any post-earnings weakness in case of profit booking to buy into Microsoft stock as the company is set for another strong earnings performance.
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