I’m legitimately curious to see earnings from Microsoft (NASDAQ:MSFT) next week. Microsoft stock already has recovered about half of a brief dip earlier this month. But MSFT still has more than quadrupled in less than six years and multiples are at their highest levels since the financial crisis.
There’s two aspects to the fiscal Q1 earnings report next Wednesday evening. The first is earnings themselves. The second is how the market reacts. Both could be very interesting and highlight not only the near-term outlook for MSFT stock, but for the tech sector as a whole.
How the Numbers Might Move Microsoft Stock
Microsoft has an impressive track record of beating earnings estimates, including with the Q4 report back in July. The company really hasn’t posted a disappointing quarter relative to the Street since April of 2016, when Q3 earnings missed and revenue was in-line.
So recent history would suggest a strong Q3. So would recent performance. Azure growth has been phenomenal. Revenue rose 91% last year and 98% the year before as the company engaged Amazon.com (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL,GOOG) in cloud. Neither category growth nor market share trends appear likely to change in a single quarter.
That said, the Street is looking for a big quarter from Microsoft, with revenue and EPS both up about 14%. Microsoft has hit those bogies the last two quarters which means the recent acceleration in growth is going to have to continue. And given the MSFT price at the moment, just hitting consensus numbers might not be enough.
How Traders in MSFT Stock Will Respond
Trying to forecast anything in this market seems difficult at the moment. Investors thought the world was ending on Thursday after a 7% sell-off in the S&P 500 over six sessions. Dip buyers have jumped right in, however, prompting a strong day on Tuesday.
Over the next few weeks, the market is going to be all about earnings, as I wrote on Friday. Given its tech leadership, Microsoft will be one of the bigger ones to watch. And so the reaction in Microsoft stock to Microsoft earnings is something even investors who don’t own MSFT stock should watch closely.
Is a beat good enough? Does Microsoft get a pass if any aspect of the report (say, growth in the legacy Windows and Office products) disappoints? The fact that investors are buying a strong quarter from Netflix (NASDAQ:NFLX) suggests that they’ll do the same for Microsoft. That is, if it hits the numbers, and hits the right numbers.
Where MSFT Goes from Here
Earnings will be important from a longer-term perspective beyond the headlines for Microsoft as well. Azure remains a small part of overall revenue but its growth is key to the company’s long-term plans. And the conversion of Office and Windows from disk to cloud has helped revenue but that trend may fade as Azure grows in importance.
Even modestly off the highs, MSFT stock will only rise next week if Microsoft shows strength on those key fronts. Microsoft stock, at 22x+ forward EPS estimates, isn’t cheap any more.
Expectations are high in Q1 and beyond. I still believe last month’s dividend hike signaled a top in MSFT, as I wrote at the time. It’s going to take a big Q1 to convert more skeptics and get Microsoft stock back to all time highs.
As of this writing, Vince Martin has no positions in any securities mentioned.
