Microsoft (NASDAQ:MSFT) reports third-quarter earnings on April 29. And while many companies have seen their stock lose ground dramatically in 2020, Microsoft stock has bounced back from the March market selloff to post near 11% growth so far this year.
However, the company has warned that with the novel coronavirus playing havoc in its supply chain and shutting stores, sales of Windows devices will be down for the quarter. Will that level out due to the massive uptake in products like Skype and Xbox Live as Americans shelter-in-place? Will Q3 earnings slow or accelerate Microsoft stock growth?
With those questions in mind, let’s dive in.
Microsoft Issues Third-Quarter Warning
As January wound down, MSFT handily beat expectations for its first quarter — topping analyst projections for both revenue and earnings. That result boosted Microsoft stock, although the enthusiasm was relatively short lived. Just three weeks later, the market started to feel the effect of coronavirus worries.
On Feb. 26, Microsoft released an update warning investors that the pandemic was going to impact its Q3 revenue for Windows OEM and Surface revenue:
“Although we see strong Windows demand in line with our expectations, the supply chain is returning to normal operations at a slower pace than anticipated at the time of our Q2 earnings call. As a result, for the third quarter of fiscal year 2020, we do not expect to meet our More Personal Computing segment guidance as Windows OEM and Surface are more negatively impacted than previously anticipated. All other components of our Q3 guidance remain unchanged.”
In other words, the company is concerned that between manufacturing challenges and store closures, Surface device sales will be down. In addition, those same issues are hitting third party PC manufacturers. That means Microsoft’s Windows revenue will take a hit for the quarter.
That news helped contributed to MSFT stock sliding 7% the following day. Also not helping the situation was a report from IDC released on Feb. 27. According to IDC’s projections, overall personal computing devices (desktop PCs, laptops, workstations and tablets) will see a decline in shipments of 9% for 2020. That is expected to be a combination of manufacturing logistics from early in the year, followed by a demand slowdown.
Jitesh Ubrani, research manager for IDC’s Worldwide Mobile Device Trackers, had this to say on the subject:
“There’s no doubt that 2020 will remain challenged as manufacturing levels are at an all-time low and even the products that are ready to ship face issues with logistics. Lost wages associated with factory shutdowns and the overall reduction in quality of life will further the decline in the second half of the year as demand will be negatively impacted.”
What Do Q3 Earnings Hold in Store?
Microsoft is going to see a Q3 impact from the coronavirus pandemic. The company has already acknowledged the hit its Windows division is going to take. However, Azure and the company’s Intelligent Cloud division is expected to post continued growth that would help to offset that slide.
Massive increases in use of Skype and Teams by Americans who are working from home — combined with a big uptick in Xbox Live gaming use — may pay off in the future through additional paid subscriptions. But for Q3, don’t expect these to be a factor.
Analysts are expecting the company to deliver quarterly earnings per share of $1.28 on revenue of $33.88 billion. In comparison, MSFT delivered EPS of $1.14 on revenue of $30.6 billion in Q3 2019.
Bottom Line on Microsoft Stock
Even if the company’s Q3 earnings end up disappointing the market, an investment in Microsoft is a good buy. The company has been firing on all cylinders since Satya Nadella took the reins as CEO, and is worth more than Apple (NASDAQ:AAPL) — despite not having a real entry in the smartphone game.
For 2020, the coronavirus will likely continue to drag on the sales of physical products such as Surface devices. Disruption in supply chains could result in Xbox One X delays, or limited quantities. And if the economy fails to bounce back from the pandemic, demand for these devices might slip.
Despite these risks, though, Microsoft is a solid bet for even more growth in 2020.
Brad Moon has been writing for InvestorPlace.com since 2012. He also writes about stocks for Kiplinger and has been a senior contributor focusing on consumer technology for Forbes since 2015. As of this writing, Brad did not hold a position in any of the aforementioned securities.
