Next Thursday, Microsoft (NASDAQ:MSFT) will announce its fiscal fourth-quarter results. The earnings looks poised to be rather important. After all, Microsoft stock has been on a nice bull run, with the shares up about 36% for the year so far, putting its market cap at a staggering $1 trillion. In 2019, MSFT stock has performed better than various other mega tech names like Apple (NASDAQ:AAPL) and Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG).
But could analysts’ Q4 estimates for MSFT be too high, in light of the strong performance of Microsoft stock? They actually look fairly reasonable.
Consider that analysts, on average, are forecasting 9% growth on the top line to $32.8 billion and earnings per share of $1.21, up about 7% year-over-year. So analysts expect MSFT’s top-line growth to decline from the prior quarter, when its revenues climbed 14%. The fact is that it’s getting tougher for MSFT to grow rapidly because its cloud business is getting more mature.
Note that there was a lot of Microsoft news last quarter. Here’s a look at some of the highlights:
- MSFT and Sony (NYSE:SNE) are tough rivals. But they are willing to cooperate when there is an opportunity to make money. So the companies have become partners, as MSFT will integrate its systems into Sony’s massive sensor business. The deal should help keep up the momentum of MSFT’s cloud business. As for SNE, it will benefit from MSFT’s extensive AI capabilities.
- Interestingly enough, MSFT launched a partnership with another long-time rival – Oracle (NYSE:ORCL). That alliance appears to be a shot at Amazon.com’s (NASDAQ:AMZN) cloud business. The deal will allow result in the seamless integration of workloads between MSFT and ORCL’s platforms.
- At the MSFT Build conference, the company issued many new announcements. As should be no surprise, there was a big focus on the company’s cloud hosting platform and its AI. MSFT highlighted a few updates for Office 365, including an AI-powered grammar system.
- MSFT teamed up with JPMorgan Chase (NYSE:JPM) to leverage blockchain. The focus will be on helping JPM’s clients better use this technology.
- At the E3 conference, MSFT provided details on 60 of its upcoming games – like Halo Infinite and Gears 5 — as well as the next Xbox, which is expected to launch during the 2020 holiday season. The company also announced its cloud gaming service, xCloud.
The Bottom Line on MSFT Stock
The valuation of MSFT stock is far from cheap. Consider that the forward price-earnings multiple of Microsoft stock is 27. The dividend yield is also a meager 1.33%.
But MSFT stock deserves a premium, as the company has returned to its winning ways. MSFT has retooled its legacy Office and Windows franchises. Its bold acquisitions, including its purchases of LinkedIn and Github, have enabled MSFT to enter new markets.
And more importantly, MSFT’s fast-growing cloud business has been quite successful, as it is now the clear number two in the industry. In fiscal Q3, the revenue of its cloud unit spiked by 73%.
And finally, the company is also a huge generator of cash, which allows it to continue making investments, acquisitions and buybacks. In other words, when it comes to next week’s earnings report, it’s a good bet there won’t be negative surprises for the owners of Microsoft stock.
Tom Taulli is the author of the upcoming book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.