Microsoft Corporation (NASDAQ:MSFT) has become sort of a cool stock again, with strong progress in cloud-based services helping to send MSFT stock up 9% since late June alone.
But whether Microsoft earnings after Tuesday’s bell can maintain the recent strength in MSFT stock is another matter.
There’s no question it was a rough quarter. Earnings per share and revenue most likely will be lower than the year-ago period. The market is braced for it, of course, but should remain cautious after Microsoft earnings missed Wall Street’s expectations in the previous quarter.
MSFT is transitioning away from software to cloud-based services — undoubtedly the way to go — but it’s going to be a long and expensive project. The cloud is driving Microsoft’s results and share price, but it’s still a minority part of the business. Software aimed at PCs still accounts for about 40% of the top line, and PC shipments are a slowly melting iceberg.
The challenge, then, is to scale the cloud business faster than the legacy operations deteriorate.
As with other old-line tech mega-caps, all eyes will be on cloud-based services. As analysts at Morgan Stanley put it:
“A challenging third-quarter 2016 left several core questions for the software giant to address in its fourth-quarter report, expected after the close on Tuesday, July 19: 1) Where does the demand driving growth for its cloud computing platform Azure come from—green-field development or cannibalistic operations? 2) What does the gross margin path for its commercial cloud business look like going forward? And, 3) How susceptible are Microsoft earnings to a volatile macro backdrop?”
Investors in Microsoft stock also can expect some more information and color on its recent $26.2 billion acquisition of professional social media site LinkedIn Corporation (NYSE:LNKD).
MSFT Stock Is Set for a Pullback
As far as the headline numbers go, Microsoft earnings report will be lackluster. Analysts on average expect profits to come to 58 cents a share, down from last year’s 60 cents per share, according to a survey by Thomson Reuters. Revenue is forecast to slip fractionally to $22.14 billion.
All of that should more than be priced into Microsoft stock, but after a recent hot run, some analysts think MSFT is ready to cool off. BMO Capital Markets said in a note to clients:
“We think Microsoft will make the June quarter, with some upside tension, but guide lower, which seems to be a consistent pattern. We believe that investors expect numbers to move lower. Nevertheless, we would expect to see the shares come under some pressure, given the recent positive stock move.”
That said, BMO remains positive on MSFT stock for the longer-term, rating shares at “Outperform” (buy, essentially). The target price of $57 implies upside of more than 11% in the next year or so, which looks pretty good in today’s market.
Sentiment on Microsoft hasn’t been this upbeat in a long time. The company has shaken off its failed foray into mobile and is gaining investors’ trust with its cloud strategy.
In other words, at least MSFT has a plan.
Microsoft really does appear to have a second act in it, but that doesn’t mean it’s ready to raise the curtain just yet.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
