Microsoft's bottom line: Trillion Dollar Valuation Drives Continued Growth of the Cloud



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The growth of Microsoft Corp.'s cloud service Azure will be instrumental in determining whether the software giant will maintain its $ 1 trillion market capitalization after its earnings report.

Microsoft

MSFT, + 0.36%

Fourth quarter earnings are expected to be released after the July 18 bell. Shares closed at a record $ 138.40 on Thursday, and they are up 36% since the beginning of the year, while the iShares Expanded Tech-Software Sector ETF has risen 31%

IGV, + 0.21%

In comparison, the S & P 500 index

SPX, + 0.46%

is up nearly 20% for the year.

With Azure revenue up 73 percent in the last quarter and the fastest growing company, investors are wondering if this pace can be maintained and if Microsoft will continue to significantly reduce the share of Amazon.com Inc. & # 39; s

AMZN, + 0.50%

dominance in the public cloud market.

Kirk Materne, an analyst at Evercore ISI, says Microsoft is one of the top performers with a target price of $ 165. Investors may need to be patient in the short term, given the good long-term risk / return to the investor, especially given the good first half of the software industry.

"As we move towards 2H, our general view is that, even if the drivers of the group's long-term demand remain intact, investors will have to be patient while shares equate 1H gains," he said. Materne. "In fact, when you look at the performance of software vendors on a 1H vs. 2H basis over the last 10 years, a strong 1H performance is usually followed by a 2H slowdown (it's not a shock). . "

What to expect

Earnings: Of the 30 analysts surveyed by FactSet, Microsoft is expected to average an adjusted profit of $ 1.21 per share, against $ 1.19 per share expected at the beginning of the quarter. Estimize, a software platform that leverages crowdsourcing of hedge fund executives, brokerages, buy-side analysts and others, claims a profit of $ 1.25 per share.

Returned: Wall Street is expecting a $ 32.75 billion business figure with Microsoft, according to 19 analysts surveyed by FactSet. Estimize forecasts revenues of $ 33.03 billion.

Microsoft said it expected productivity and business process revenues of $ 10.55 to $ 10.75 billion in the fourth quarter, while analysts expected $ 10.69 billion. The company also forecast sales of Intelligent Cloud from $ 10.85 billion to $ 11.05 billion, of which Azure is part, as well as PC revenue of $ 10.8 billion to $ 11.1 billion. Analysts expect sales of $ 11.03 billion in the smart cloud and $ 11 billion in computers.

Movement of stock: Microsoft has gone into the rare corporate club with a valuation of $ 1 trillion just after its last earnings report. Since then, stocks have gained nearly 11%. In comparison, the Dow Jones Industrial Average

DJIA, + 0,90%

grew by 1.9%, the S & P 500 gained 2.5% and the Nasdaq Composite Index

COMP + 0.59%

grew by 1.1%.

Of the 32 analysts who cover Microsoft, 29 have buy or overweight ratings, two with hold ratings and one with sell ratings, with an average price target of $ 144.41, according to FactSet data. .

What to look for in the call

Nick Yako, an analyst at Cowen, estimates that Azure could take 25% of the public cloud market by 2025, against 19% currently, and represent nearly 60% of turnover against 30% currently.

"We expect Microsoft's commercial cloud, including Office 365 Commercial and Azure, to be the primary driver of future growth," said Yako, launching Microsoft's hedge with an outperformance rating and a target price of 150 USD.

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Jefferies analyst, John DiFucci, who breaks the underperforming stock ranking and his $ 80 course goal, said that while Microsoft was "one of the biggest software successes in the brief history the sector was overvalued and Amazon Web Services may force the software giant to use cloud services with thin margins, as in the case of retailers.

"Azure will probably never see the much-anticipated profit margin due to cultural and technical factors, and an unprecedented increase in cash flow generated by Windows may not last," DiFucci said. "Azure will probably never see margins similar to those of AWS, and even the long-term margin of AWS could be lower than most expectations."

"We believe that AWS's operating margin could shrink significantly over time, given Amazon's history, which would further reduce Azure's margins in such a scenario, which would be disastrous for Microsoft." Said DiFucci.

See also: The hurry to beat Chinese tariffs pushes PC shipments upward

Keith Weiss, an analyst at Morgan Stanley, said that Azure was only part of the story and that Microsoft would support growth through a hybrid cloud strategy including its offering server products and tools higher margins.

"Given Microsoft's strong hybrid cloud positioning, combined business management focus, and market-driven and customer-driven buying decisions based on Azure's onsite + Azure product portfolio, this is in probably represents a clearer view of the demand for Microsoft products. infrastructure software, "said Weiss, who has an overweight rating and a price target of $ 145.

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