Nadella Has Microsoft Corporation (MSFT) Stock Purring Like a Kitten

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Just a little more than a year ago, Microsoft Corporation (NASDAQ:MSFT) was anything but a sure thing. It seemed ill-equipped to compete with Amazon.com, Inc. (NASDAQ:AMZN) in the cloud. It wasn’t clear that the relatively new CEO Satya Nadella was going to make the company’s Office suite a worthy revenue center again. And the software giant was rolling the dice on a Windows 10 operating system that, if a flop, could spell doom for MSFT stock.

Microsoft Corporation (MSFT) Q3 Earnings Preview

What a difference a year makes.

Not only was Windows 10 well received, Microsoft is just crushing it in the cloud on the back of its Azure product.

Still, while Nadella seems to be getting all the company’s ducks in a row, Microsoft stock holders have yet to see a particularly decisive quarter that suggests the company is back to its former greatness.

Will Thursday’s fiscal Q3 report do the job?

Microsoft Earnings Preview

As of the latest look, analysts collectively expect the software giant to turn $23.4 billion worth of revenue into a profit of 69 cents per share for the recently completed quarter. MSFT earned 62 cents per share of on $22.1 billion in sales in the same quarter a year earlier.

The outlook, if met, would mark the best revenue growth Microsoft has mustered in two years.

The past couple of years haven’t been easy ones. Sales continued to grow in 2015, but income took a big hit as then-relatively new CEO Nadella wasn’t able to get the organization entirely ready for the rapid rise of cloud computing. Income rebounded but sales fell in 2016, leaving investors unsure as to the sort of growth the company was capable of producing.

Slowly but surely, though, Microsoft has unveiled new initiatives that make its existing services more marketable. The final quarter of last year (June) saw respectable growth, but not convincing growth. Thursday’s post-close report of third-quarter results has the potential to prove the company is on the right track.

What to Watch

Though the top and bottom lines will be the most looked-at measure of the company’s third quarter report, there’s a select group of details that will ultimately push MSFT stock higher or lower. Three matters stand out above the rest. In no certain order, keep an eye (and ear) on…

LinkedIn Impact: The acquisition of LinkedIn wasn’t completed until December 8, so Microsoft hasn’t yet reported a full quarter with its sales and earnings contribution factored in. That will change on Thursday.

We do have a pretty good idea of what to expect, though. Before the buyout was consummated, LinkedIn was doing nearly a billion dollars worth of business a quarter, and had just turned profitable. Microsoft may have stepped in right at the company’s inflection point.

That being said, MSFT stock owners have only begun to see what the company intends to do with the professional networking site. Only in the past few days has Microsoft explained it wants to integrate LinkedIn’s data with its Dynamics 365 platform. That still only scratches the surface of how LinkedIn could be leveraged, though.

CloudBook: While Windows 10 may still be the king of all laptop operating systems, Microsoft doesn’t really have much of a presence in the low-end and small form-factor netbook space. That’s where Alphabet Inc (NASDAQ:GOOGL) is really starting to gain traction with its Chromebook lines.

That may be about to change, however. Microsoft is prepping a launch of a so-called CloudBook, which will not only be price- and performance-competitive with Chromebooks, but will offer a very familiar and very flexible Windows operating system.

Cloud/Azure: For the unfamiliar, Azure is an efficient way for users to interface with a variety of cloud services. It matters just because Microsoft wouldn’t be making any revenue headway in the cloud without it.

Last quarter’s server and cloud services revenue was up 12% on a year-over-year basis, thanks to Azure’s 93% top-line improvement. The company has been adding to Azure’s menu in the meantime.

Bottom Line for MSFT Stock

While its fiscal third quarter is an important one, don’t let a lack of a big earnings beat paint an unnecessarily pessimistic picture of what’s to come. Although it’s taking a while, Nadella really does seem to have all the parts of the engine synced up quite nicely.

As our Chris Lau said on Monday:

“Microsoft continues to produce strong revenue growth and profits. Its cloud-computing platform is expanding, and the costs to build it are falling. As more companies migrate apps to cloud services, Microsoft’s sales will keep going up. Meanwhile, MSFT stock still has the support of Microsoft’s legacy businesses and strong cash return to shareholders via dividends and buybacks.”

It’s tough to disagree with that assessment. The only concern a newcomer might feel is stepping into MSFT stock after the 35% run-up its dished out following its year-ago earnings report. Meanwhile, shares continue to touching new highs in 2017.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/04/nadella-has-microsoft-corporation-msft-stock-purring-like-a-kitten/.

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