Microsoft earnings preview: Cloud business has nothing but blue skies

It may sound like a broken record, but Microsoft Corp. continues to do just that: break financial records.

When the software behemoth

MSFT, -0.28%

 reports its results Wednesday, Wall Street is ready for another strong quarter.

Indeed, after a strong 2019 in which its market valuation surged past $1 trillion, expect more of the same in 2020 and beyond from Microsoft, Evercore ISI analyst Kirk Materne said in a Jan. 22 note that maintains an Outperform rating and price target of $180. His report’s title? “MSFT — More Popular Than Baby Yoda.”

Materne forecasts strong second-quarter results – indeed the next three to five years – because of Microsoft’s cloud portfolio, its growing annuity revenue base, and its strong balance sheet. Microsoft Azure should grow 53% year-over-year in 2020, he said. Office 365, he added, “continues to see a long runway in terms of transitioning customers to higher SKUs.”

Microsoft’s hybrid cloud is well positioned against market leader Inc.

AMZN, -0.83%

 and third-place Alphabet Inc.’s

GOOGL, -0.73%

GOOG, -0.72%

 Google, according to two recent surveys by Wall Street firms.

In a survey of CIOs, Morgan Stanley concluded Microsoft is widening its lead as the preferred hybrid cloud vendor, with 42% using or likely to use Microsoft vs. 21% for AWS.

Credit Suisse’s survey of 80 CIOs showed Azure as the preferred cloud enterprise option for 76% of respondents.

“We remain constructive on the long-term opportunity for Microsoft, supported by our CIO survey that suggests share gains in the cloud as well as our bottom-up analysis indicating commercial cloud revenues could exceed $100bn in 5 years,” Credit Suisse analyst Brad Zelnick said in a Jan. 13 note. He raised his price target to $180 from $155, with a “blue-sky valuation” of $200.

What to expect

Earnings: Of the 15 analysts surveyed by FactSet, Microsoft on average is expected to post earnings of $1.32 a share, up from $1.26 a share expected at the beginning of the quarter.

Estimize, which crowdsources estimates from buy and sell-side analysts, fund managers, academics and others, is forecasting EPS of $1.32, based on 154 estimates.

Revenue: Wall Street expects revenue of $35.7 billion from Microsoft, according to analysts polled by FactSet. Microsoft reported revenue of $32.5 billion during last year’s second quarter, and net income of $8.4 billion, or earnings of $1.08 per share.

Estimize is forecasting revenue of $35.7 billion, based on 152 estimates.

Of the 35 analysts who cover Microsoft, 32 have buy or overweight ratings, 3 have hold ratings, and none have a sell rating, with an average price target of $175.74, according to FactSet data.

Stock movement: Microsoft shares are up 55% in the past 12 months, compared with a gain of about 24% for the broader S&P 500 index

SPX, -0.65%


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