Few tech companies have as much riding on their next earnings report as Microsoft Corporation (NASDAQ:MSFT), which reports on Oct. 20 after the market closes.
After its last report, on July 19, MSFT stock took off, rising $2.82 in one day and not looking back. The shares hit a short-term peak in August, but have held most of their gains, trading on Oct. 17 at about $57.20.
The rise is predicated on the idea that Microsoft can repeat its June trick. The current whisper number for earnings is 72 cents a share, up from 68 cents in June, with revenue of $21.54 billion. That sales figure, if achieved, would be 5% ahead of what it did the last time it reported earnings.
But when the MSFT stock earnings report comes out, analysts will be looking at more than just the earnings. They will be looking at the whole balance sheet, and another earnings report two weeks later.
The New Microsoft (MSFT)
Satya Nadella has re-made Microsoft in his image since being appointed CEO in February 2014, transforming it from a PC software company to a cloud-first company, with applications and data backed up to its Azure cloud.
It has taken billions of dollars in new investment to reach this point, and investors are looking for a return on that money.
Microsoft began slowing its capital spending during fiscal 2016, after building a network of cloud data centers under its Azure brand that has most analysts calling it No. 2 in the cloud, only behind Amazon.com, Inc. (NASDAQ:AMZN) and its AWS platform.
The transformation has gone much deeper than that. Last year’s Windows 10 release may be the last for the operating system. MSFT is now planning on delivering a “major upgrade” to Windows in March, online, but the name of the software will not change.
The same thing has occurred with the company’s Office franchise, which is now Office 365. Rather than being sold with disks, it is now sold through an annual subscription that includes updates and storage of files on what it calls “OneDrive,” which automatically backs-up user files as they’re saved to a local disk. Buyers get a digital “key,” an authorization code, to unlock a download from the company’s cloud.
Cloud-based operating systems and applications have now been delivered across the company’s product line. Microsoft offers bare-bones infrastructure at prices competitive with those of Amazon, and soon, will deliver cloud-based customer relationship management and Enterprise Resource Planning database applications to compete directly with those of salesforce.com, inc. (NASDAQ:CRM).
The LinkedIn Surprise
Microsoft’s rise of 18% since July has expanded its price-earnings multiple to 27. This is a lot closer to the 31 P/E of Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) than the 13.7 of Apple Inc. (NASDAQ:AAPL), with which it has so often been compared.
Thanks to its improvement, there is also breathing space between MSFT’s market cap ($449 billion) and those of hard-charging rivals like Amazon.com ($383 billion) and Facebook Inc (NASDAQ:FB) ($368 billion). That’s important, because stock is often the currency used in takeovers, and victory in the “great game” at the bleeding edge of technology is often based on the ability to execute, and succeed with, takeovers.
MSFT is a big player in the great game.
Microsoft has made seven small takeovers so far this year, but its biggest risk remains pending — the $26.2 billion acquisition of LinkedIn Corp (NYSE:LNKD) in June, due to close by the end of the year.
How MSFT is choosing to finance that deal will be closely watched Thursday. It could have repatriated some of the cash and short-term investments on its books — more than $113 billion was on the books in June. More likely, it will show an increase in its own debt, which would raise its debt-to-assets ratio from about 25% to about 33%.
Look Beyond the Bottom Line
Since the deal with Microsoft was announced, LinkedIn has been warning of slowing growth. The company will report September earnings on Nov. 3, and these will be its last as a separate entity. Facebook is ready to pounce on any resistance to Microsoft among LinkedIn users with its Facebook Workplace.
Analysts are hoping LinkedIn will report earnings of 27 cents per share of earnings on revenue of $949 million. If it comes up short of that mark, it could impact the value of MSFT stock even more than its own Thursday earnings report will.
When the earnings are announced, in other words, look at more than the earnings. And look beyond MSFT stock before buying more shares.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares of MSFT, AMZN, AAPL and GOOGL.
