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Microsoft Corporation (MSFT): Don’t Sit on the Sidelines of Microsoft Stock Ahead of Earnings

Microsoft Corporation (MSFT) has had a really good run of late, even in an otherwise choppy market.

Microsoft Corporation (MSFT): Don’t Sit on the Sidelines of Microsoft Stock Ahead of EarningsTo wit, Microsoft stock is currently up 25% over the past year despite the market-wide correction to start 2016.

That’s not too shabby, as it seems that investors are embracing Microsoft Corp CEO Satya Nadella’s new cloud-first, mobile-first vision of MSFT.

So what should you watch out for when Microsoft releases its earnings Thursday after the market close, and what should we expect for Microsoft stock?

Breaking Down Microsoft Stock Earnings

The analyst consensus estimate is for quarterly per-share earnings growth to come in at 71 cents and revenue to come in $25.3 billion.

Crowd-sourced research site Estimize, which regularly comes closer than the Wall Street analysts to predicting actual earnings results, comes up with similar numbers. The Estimize consensus is for EPS of 71 cents per share on revenues of $25.2 billion. So should MSFT earnings or revenues come in significantly higher or lower than these figures, you can expect Microsoft stock to move in a big way after-hours.

The devil is in the details, of course, and there are certain things that investors will be listening for. First and foremost, Nadella will need to give an update on Microsoft’s cloud business.

Showing a penchant for forward thinking that was sorely lacking in his predecessor Steve Ballmer, Nadella was very quick to see past the PC age for Microsoft and embrace the cloud. And frankly, it’s good that he did: PC sales continue to wither away, falling for four consecutive years and counting. PC sales today are at roughly the same levels as 2007.

Not long ago, those kinds of figures would have been devastating for Microsoft. That Microsoft stock has continued to rise in spite of them is testament to how effective Nadella has been, both in shifting the direction of the company and in shifting investor expectations.

The focus this quarter will be on Microsoft’s booming cloud business, where MSFT’s Azure enterprise cloud platform is now second only to Amazon (AMZN) Web Services. Given Microsoft’s decades-long enterprise relationships, I expect it will eventually muscle out Amazon to take the crown here. Investors will want to see serious growth in this segment, preferably 100% to 125% or even more. Microsoft and Amazon are absolutely burying IBM (IBM) and its traditional competitors, and I don’t expect that trend to reverse.

Also in focus will be Microsoft’s Office 365 subscription-based version of its classic Office package. Microsoft made the decision years ago to change the way it sold Office. Rather than sell the software as an individual license — earning a large sale that might not be repeated again until the next upgrade, years later — Microsoft is now aggressively pushing Office as a monthly subscription service. The end result will be a much more stable and predictable stream of revenue, though the transition itself meant an immediate reduction in revenue for Microsoft.

Look for Nadella to give a lengthy update on Office 365, including an update on the total number of licenses sold on Alphabet’s (GOOG,GOOGL) Android and Apple’s (AAPL) iOS devices.

And finally, look for Nadella to make some mention of MSFT’s dividend and share repurchase program. Over the past five years, MSFT has boosted its dividend at nearly 19% per year while also repurchasing billions of dollars in Microsoft stock. As Microsoft continues to turn its businesses around, I expect further gifts to shareholders.

January has thus far been a rough month, and earnings season isn’t exactly getting off to a stellar start. But I’m comfortable going into Microsoft’s earnings release long and strong. MSFT is still in the middle innings of its post-PC turnaround, and I expect more good news to come.

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

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