Microsoft Earnings Momentum Makes Its Stock A Safe Bet, But For How Long?
Investing.com | Jul 17, 2019 03:36AM ET
* Reports Q4, 2019 results on Thursday, July 18, after the market close
* Revenue Expectation: $32.75 billion
* EPS Expectation: $1.21
Microsoft (NASDAQ:MSFT) is unlikely to disappoint investors when it reports its fiscal fourth-quarter earnings on Thursday afternoon: so many things are going right for this tech giant.
Following a massive transformation under its Chief Executive Satya Nadella, Microsoft has become one of the most powerful players in the fast-growing cloud-computing market, commanding the second largest market share, with only Amazon (NASDAQ:AMZN) ahead.
More than five years ago, Nadella made the bet to diversify Microsoft’s revenue away from its traditional growth engines — Windows and Office — by investing heavily in data centers and other infrastructure to help corporate customers run applications and store their data. The growth in this market continues unabated for Microsoft, powering its operating income.
Microsoft’s Intelligent Cloud segment now comprises more than 30% of the company’s overall revenue base. Sales from commercial cloud services, including Azure, internet-based versions of Office software and some smaller products, rose 41% in the quarter that ended in March, while profit margins for the business widened to 63%.
We believe this strength will once again be on display when Microsoft releases its earnings report tomorrow. The company's is seeing ongoing success in winning both large and small clients. In the fiscal third quarter, many large brands signed agreements to use Microsoft’s Azure cloud software, including grocer Kroger (NYSE:KR) Co., Walgreens Boots Alliance (NASDAQ:WBA) Inc. and oil giant ExxonMobil (NYSE:XOM).
These wins for the company’s cloud business were mainly responsible for fueling a powerful rally in Microsoft shares this year, separating it from other large-cap tech giants, such as Facebook (:NASDAQ:FB) and Google's parent, Alphabet (NASDAQ:GOOGL) — who are struggling amid antitrust probes and data privacy concerns.
Microsoft shares—which closed yesterday at $137.08—are up around 35% this year. This surge has pushed the company’s market value back above the coveted $1 trillion level, making it the world’s most valuable corporation.
h2 Will This Rally Continue?/h2Going forward, the big question for investors is how far can this rally go? At almost 31 times forward earnings, Microsoft’s shares are selling at a premium when compared to many top tech stocks. They also carry the highest multiple the stock has commanded in more than 15 years, according to FactSet.
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In our view, the factors that supported Microsoft shares in the past 12 months are still very much in the play. The cloud computing market is expected to grow from $285 billion in 2017 to $411 billion by 2020. That segment alone is big enough to drive the company’s revenue growth for the next three to four years, according to Microsoft executives.
Coupled with cloud momentum, Microsoft is also benefiting from strong PC sales. The IDC reported last week that PC shipments jumped nearly 5% year over year, thanks in part to the pending expiration date for Windows 7, which goes out of service in January of next year. According to a report in the Wall Street Journal, Microsoft also plans to launch a new Xbox console about midway through its 2021 fiscal year.
Bottom Line
As investors fret about the global economic outlook and the longevity of this bull cycle, Microsoft's fundamentals make it a safe bet in the tech space. We believe Microsoft’s earnings momentum will continue as it expands its market share in the cloud computing segment while maintaining its leading position in legacy software products such as Windows and Office. This durable advantage will help the company achieve sustained, double-digit growth in revenue, earnings per share and free cash flow, making it a reliable tech stock to own over the long run.
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