Microsoft Corporation (NASDAQ:MSFT) stock has been easy money for about 18 months now. MSFT stock has nearly doubled over that timeframe, and done so almost quietly.
After all, many of Microsoft’s mega-cap tech peers have performed strongly as well but with a lot more noise. Facebook Inc (NASDAQ:FB) has dealt with “fake news” and, more recently, changes to its news feed. Alibaba Group Holding Ltd (NYSE:BABA) continues to face criticism of its accounting.
Amazon.com, Inc. (NASDAQ:AMZN) bought Whole Foods, and has been the poster child for a supposedly overbought market, with endless discussion of whether it’s just too expensive even as it marches higher.
But Microsoft really hasn’t changed that much. It’s shifting its core Windows and Office products to the ‘cloud’ from disc-based versions. It’s closing the gap on Amazon in cloud services.
Dynamics is threatening Salesforce.com, Inc. (NYSE:CRM) in CRM software. Modest, incremental improvements under CEO Satya Nadella have mostly done the trick. A steadily expanding earnings multiple has helped as well.
It’s not the sexiest story in the market. The company still has a “second-place problem.” Yet while I was admittedly very slow to come around to the bull case for MSFT stock, I did so after a blowout Q1 report in November.
Heading into Q4 earnings on Wednesday afternoon, with MSFT stock 10%+ higher, I’m staying bullish. MSFT isn’t necessarily cheap anymore, and its gains are likely to moderate after a ~38% increase in 2017. But the story is working, even if it’s doing so quietly. And there’s no reason to see that changing in Wednesday’s report.
Q2 Earnings Should Be Bullish for MSFT Stock
Even with MSFT having gained of late, expectations don’t look particularly high for the fiscal second quarter. Wall Street consensus projects a 7.5% increase in EPS on the back off an 8.9% increase in revenue.
Neither figure looks particularly onerous. Q1 revenue increased 12% and EPS rose 17%. But there’s little reason to see a deceleration in growth just three months later. The Azure cloud platform is hitting tougher comparisons.
The 90% increase seen last quarter, which provided a likely 5-6 bump to overall top-line growth, should moderate in Q2. But that’s a likely 2-3 point impact at most, and elsewhere Microsoft’s strategy isn’t coming to an immediate end.
Dynamics rose 13% last quarter; Microsoft appears to be making consistent inroads there. The shift to Office 365 drove sales up 12%; that shift has years left to play out. PC sales are weak, but Windows continues to outgrow the market and there, too, there’s no reason to see a sharp change in trend.
From a high-level perspective, expectations simply look too low. And given that Microsoft has easily beaten estimates regularly over the past few years, the obvious bet is that Q2 numbers will do the same.
Will MSFT Stock Rise?
That said, an earnings beat doesn’t necessarily mean that a stock will rise. Forward-looking commentary on the conference call can have an impact. Investors may be expecting a beat, limiting potential upside in MSFT stock even if numbers are above consensus.
And truthfully, I’d be surprised to see a big move in MSFT coming out of earnings. Even one of the most bullish analysts on the stock, who slapped a potential trillion-dollar market cap on Microsoft stock, still sees it taking ~four years to get to that level. That implies roughly 13% annual gains, and MSFT already is up 10% this year.
But from a long-term standpoint, that’s OK. Microsoft simply needs to keep the story here intact, and Q2 should be more than good enough on that front. Microsoft used to look like a laggard, dependent largely on a declining PC and server business under pressure from smartphones and cloud adoption.
That’s just not the case anymore. Microsoft is adapting and has retaken its place as an innovative tech giant. That’s not going to change in a quarter and neither is the trajectory of Microsoft stock.
As of this writing, Vince Martin has no positions in any securities mentioned.
