Why Microsoft Will Deliver Another Strong Earnings Beat

Summary
  • Microsoft is about to release its fiscal first-quarter results, and I expect to see yet another earnings beat.
  • The upside to consensus will likely come from PC, while I expect reported opex relative to sales to be lower than guidance.
  • MSFT is a great stock to own due to factors that range from solid business fundamentals, likely earnings beat around the corner, and relatively low valuations.
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Microsoft (MSFT) is hours away from sharing the results of its fiscal first quarter of 2021. The earnings release should drop minutes after the closing bell, on October 27. Analysts expect to see revenues increase about 8%, a noticeable deceleration from eleven consecutive quarters of double-digit top-line growth. Meanwhile, projected EPS of $1.55 would represent a low-teen improvement YOY.

With a history of topping earnings estimates each quarter since mid-2016, I would not be surprised to see the Redmond, Washington-based tech company deliver stronger-than-expected results once again. Supporting robust financial performance will likely be Microsoft’s PC segment, a sector that has been glowing white hot in this stay-at-home economy, possibly helped by some growth recovery in cloud.

What I expect to see

It helps to think of Microsoft as three independent (but interconnected) businesses of roughly equal size, in revenue terms. Last quarter, Microsoft guided for solid growth in cloud, at 17%; modest sales increase in productivity and business processes, at 6%; and no top-line improvement in PC. See table below.

Source: D.M. Martins Research, data from earnings call

I have no good reason to doubt that the first two segments will perform well. Cloud experienced a bit of a hiccup in fiscal fourth quarter of 2020, what I believe to be the result of a small correction from the previous period’s “two years’ worth of digital transformation in two months.”

Take Azure, for example. The crown jewel of Microsoft’s cloud business has been rising at a 50%-plus pace since the platform was launched. However, growth decelerated the most ever last quarter (see chart below). I expect to see Azure’s top-line expansion return to a more normalized pace of about 55% YOY, now that revenue timing shifts should be less of a factor than they were last time. Should this be the case, intelligent cloud revenues will likely exceed management’s de-risked guidance.

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