Microsoft Corporation (MSFT) Stock Will Plow Through Q4 Earnings

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When Microsoft Corporation (NASDAQ:MSFT) reports its fourth-quarter and full-year earnings Thursday after the bell, Wall Street will be expecting much out of the blue-chip technology giant, especially after last quarter’s easy profit beat. But regardless of what Q4 alone brings, MSFT stock — with a decent valuation, fair yield and suddenly resurgent growth prospects — looks more attractive than it has in years.

Microsoft (MSFT)
Source: Microsoft

Microsoft’s core business is healthy thanks to its early move from Office software to the cloud-based Office 365 subscription service. But MSFT’s digital transformation is hardly through. Cloud services, AI, and natural user interface technology are just a few of Microsoft’s ambitions.

Office and the Cloud

In the near-term, including Q4, if you’re looking for drivers of MSFT stock, look toward continued growth in Office 365 growth. The company expanded its offerings, and made the productivity suite available to more than 180 markets last quarter. One Drive and Skype for Business will add a rich feature set for business users.

There is some danger. Charging too much for the bundle could limit the appeal for subscribing to other apps besides the office productivity suite. Customers have other options like Box Inc (NYSE:BOX) or Dropbox for cloud storage. Facebook Inc (NASDAQ:FB) offers WhatsApp, which is an alternative to Skype. And Amazon.com, Inc.’s (NASDAQ:AMZN) AWS is a better alternative to Microsoft’s cloud and Azure solution.

Fortunately, customers see the appeal in Microsoft’s SaaS, IoT, and data management solutions on MS SQL Server; the company plans to release SQL Server 2017 later this fall. Along with a hybrid computing environment on Azure, customers have plenty of good support if they stick with an all-Microsoft solution.

Microsoft will add hybrid cloud for SQL too. For example, an on-premise SQL installation may have some of the tables extended to the cloud.

All told, Commercial Office 365 and demand for cloud solutions will drive Microsoft’s expected revenue of between $8.2 billion and $8.4 billion.

LinkedIn Evolves

Microsoft’s LinkedIn unit refreshed the news feed and reorganized the site. Last quarter, the unit added 4 points to revenue but did drag on gross margin by 6 points.

Cost cuts and the site refresh should translate to improved traffic, site utilization and a lower cost per user.

Windows Still a Cash Cow

In the last quarter, Microsoft benefited from higher SKU pricing for Windows. Looking ahead, the company expects higher-end SKU pricing normalizing and a higher proportion looking like the commercial PC market.

Still, a PC refresh in the consumer and commercial space, driven by newer graphics chips and CPUs will lift Windows sales.

In the past few weeks, though, Microsoft announced job cuts to cut operating expenses and to ready the paradigm shift in computing. Although desktop sales will represent a big portion of revenue, the market is slowing. Demand for cloud computing and storage will keep growing.

Also, the PC unit’s drag to Microsoft may finally end. Revenue from the Personal Computing unit fell 7% to $8.8 billion last quarter. As customers upgrade their computers, however, that might finally end the division’s slide.

Bottom Line on MSFT Stock

Microsoft is doing a fantastic job in maximizing profits in the declining business of PCs. It is readying the company toward a digital world, re-focusing its resources towards AI, cloud computing and cloud solutions.

I expect profitability to expand; the upcoming quarter will once again give evidence to investors that the company is moving in the right direction.

And fundamentally, it’s hard not to like the forward price-to-earnings ratio of MSFT stock — which I’d consider elevated in the past, but more acceptable now that Microsoft is actually producing growth. Meanwhile, the company still offers some protection in the form of a 2% yield.

MSFT stock looks attractive right now, but it’s a no-doubt buy-and-hold on any significant dips. So even if Microsoft’s earnings disappoint, look to any weakness as an opportunity, not a sign.

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

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get actionable insight to achieve strong investment returns.


Article printed from InvestorPlace Media, https://investorplace.com/2017/07/microsoft-corporation-msft-stock-will-plow-through-q4-earnings/.

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