Microsoft a Must Buy Ahead of Q2 Earnings

Tech giant Microsoft Corporation MSFT is scheduled to report second-quarter fiscal 2019 results after market close on Jan 30. The company’s initiatives to become a more cloud-centric company and its shift from softwarelicensing to a subscription model for its ever-present Office software has propelled the company.

The software giant has more than doubled its share price in the past three years and has surpassed the broader S&P 500 in the said period (+88.1% vs 36.7%).

Let’s now take a look at the company’s recent quarter, some mega announcements, and what investors can expect from its earnings report.

Cloud Growth a Key Factor

In the first quarter, Microsoft registered double-digit growth across all major business segments, with the best performance coming from its cloud division. Intelligent cloud business rose 24% on a year-over-year basis to $8.6 billion. Majority of analysts believe that this category will maintain rapid growth in the second quarter and have a positive impact on the company’s earnings narrative. Growth in the cloud computing segment is also expected to surpass both the personal computing and business process segments in the reporting quarter.

The company’s commercial-cloud products primarily include Azure, Office 365 commercial and Dynamics 365. Lest we forget, Azure is not only the biggest contributor to the company’s commercial-cloud revenues but is also growing at a mind blowing rate. In the first quarter, Azure revenues soared nearly 76% year over year.

Microsoft, by the way, has made a number of high profile cloud computing deals. These deals should boost profit margin and revenues. Microsoft announced a massive seven-year deal with Walgreens Boots Alliance, Inc. WBA to become its strategic cloud provider. Walgreens is planning to move most of its information technology infrastructure to Microsoft Azure. At the same time, supermarket chain Albertsons and an array of other regional grocers signed a three-year deal, making Azure their preferred platform.

Credit also goes to the company’s CEO Satya Nadella. He took quite a few valuable assets like Microsoft Office and moved them to the cloud and created cloud-hosted software services.

Is the Cloud Boom Fading?

The biggest concern in tech earnings so far is that the cloud boom maybe dying. After all, Intel Corporation INTC revealed slow growth in data-center chip sales last week. However, such a setback will have little effect on Microsoft.

Analysts continue to remain confident that Microsoft is a safe bet because of its booming Azure cloud business, something that has helped it become the most valuable company at near about $800 billion.

Earnings Results Expected to be Good

Addition of cloud computing is surely expected to help Microsoft continue its impressive record with respect to beating earnings estimates. Beyond Cloud, Microsoft’s software business and Xbox videogame offering should also stand in good stead.

Analysts widely expect Microsoft to report $1.09 earnings per share in the second quarter, higher than 96 cents recorded a year ago.

The Zacks Rank #2 (Buy) company has an Earnings ESP of +2.69%. This is Zacks’ proprietary methodology for determining stocks that have the best chance to surprise with their next earnings announcement. It provides the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Encouraging earnings performance, without a doubt, leads to a rally in share price. The company’s expected growth rate for the current year is 14.4%, more than the Computer – Software industry’s estimated rise of 10.1%. In fact, the company has been outperforming the broader industry in the past three-year period (+88.1% vs +83.5%).

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