by Ian Harvey
August 19, 2019
Microsoft will report earnings on October 24, so is it a buy before then?
There are many positive catalysts, such as the xCloud launch, stock buyback plus the anticipation of another solid earnings report.
So, find out what you could do!
Microsoft Corporation (NASDAQ:MSFT), the tech titan, has seen its shares gain +29.4% in the past year, outperforming the S&P 500’s’ gain of +2.4% during the same period. MSFT is benefiting from growing user base of its different applications like Office 365 commercial, Dynamics, Outlook mobile and Teams. As well, Azure’s expanding customer base is a key catalyst.
Now, with Microsoft expected to report Q1 earnings on October 24, and Project xCloud expected to make its debut in October, is it now the time to consider an investment in the high-flying tech company?
Since 2011, the stock has soared 425% and now commands a premium valuation of 26 times forward earnings estimates. CEO Satya Nadella, who took over in 2014, has turned MSFT into a great growth stock again by steering the company toward the massive opportunity of cloud computing services. Despite the rapid rise in the shares, the stock is still a buy because revenue and earnings grew at double-digit rates in fiscal 2019 (which ended in June), and there's still a tremendous opportunity for Microsoft to benefit from the rapid of adoption of cloud services.
When MSFT reported fourth-quarter and full-year earnings in July, the company impressed analysts and investors, soaring past estimates for both earnings and revenue.
Microsoft delivered strong Q4 results and a record fiscal 2019. Revenue of $33.7 billion handily beat analyst expectations. Earnings per share of $1.71 also topped expectations and blew past the $1.14 the company delivered in Q4 2018.
Expect MSFT to report a strong Q1 report On October 24. Microsoft is expected to report Q1 2020 earnings with analysts looking for EPS of $1.24 compared to the $1.10 Microsoft delivered a year ago.
Microsoft has many growth catalysts to count on in the next quarter and in 2020. Office software sales are benefiting from commercial clients signing up for Office 365, and on the consumer market, revenue grew 6% in the last quarter. Microsoft now has 34.8 million consumer subscribers.
The intelligent cloud space enjoys even better growth. Azure revenue grew 64%, which suggests Microsoft is taking market share.
Surface revenue grew 18% in Q4/FY2019. Microsoft will host the next Surface event, slated for Oct. 2.
Announcing a refreshed Surface, one year after the last launch and ahead of the holidays may prove timely.
The Windows operating system is still at the core of the company’s growth ambitions. As the market prepares for the end of Windows 7 support, expect a surge in sales of Windows 10 software.
Also, there is a good chance that Microsoft stock price will advance ahead of earnings in anticipation of big numbers.
YOU NEED TO BE IN TO PROFIT!
Project xCloud Factor…..
Microsoft has 17 years of game console experience and that surging Azure cloud computing division. Naturally, the two are being mashed together. Microsoft’s Project xCloud was officially announced last October, with MSFT providing further details in March.
Microsoft sees Project xCloud as opening up Xbox-class gaming to consumers who may not otherwise have access to consoles, leveraging 54 global Azure cloud centers to deliver console-quality gaming to mobile devices.
Project xCloud has the potential to help take the edge off the rapid decline in Xbox revenue, while bolstering the number of players in the Xbox camp.
Microsoft Stock Buyback…..
Microsoft said it will buy back $40 billion worth of MSFT stock. It'll also hike its quarterly dividend by 11% to 51 cents per share.
While $40 billion is a lot of money, that's slightly less than 4% of
Microsoft's $1.058 trillion market cap.
Other Positive Factors…..
The cloud is benefiting the company on the consumer side, too, with growth in subscriptions for Office 365. Additionally, Microsoft is making a significant investment in Project xCloud -- a video game streaming service, where cloud gaming is expected to revolutionize how gamers play over the next decade. There are many other ways Microsoft is leveraging its capabilities in the cloud to drive growth, including Internet of Things.
Microsoft's network effect advantage with its Windows services, combined with its growing clout in cloud services, puts the company in a very powerful competitive position. Investments in high-growth areas, such as cloud, artificial intelligence, GitHub, business applications, LinkedIn, and other areas will cause higher operating expenses in the short term, but management still expects to deliver double-digit operating income growth in fiscal 2020.
Microsoft’s gaming segment is performing well, primarily driven by a combination of Xbox Live, Game Pass subscriptions and Mixer, which are driving user engagement.
Further, acquisitions like PlayFab and GitHub expand Microsoft’s total addressable market (TAM) and penetration. Additionally, expanding partner base is notable.
Also, with Azure growing fast and becoming a greater driver of Microsoft's profits, fiscal 2020 looks poised to be a great year for the software giant.
Analysts are very optimistic about Microsoft with 27 of them rating MSFT as a “buy” with $155.38 as the average 12-month price target. That offers a nice bit of upside for investors, with the possibility that Project xCloud could factor into the equation and provide a much-needed gaming boost going into the holiday quarter.
At the moment Microsoft has remained range-bound between the low $130s and low $140s in the past three months. If Microsoft stock breaks above $140, it could have considerable upside potential.
As well, Microsoft stock’s volumes were low last month; suggesting that when a stock is in consolidation, low volume means that big institutions aren’t really selling the stock in any sort of quantity, they’re just doing a bit of profit-taking.
Be warned that it will take an uptick in revenue growth in the next quarterly report to justify a higher stock price. However, chances are good that will happen!
What Can You Do?
As mentioned earlier, Stock Options Made Easy “Armchair Trader” members executed an options trade last week.
Find out what we are recommending.
Do we expect Microsoft to move up or down?
What will “Stock Options Made Easy” advise members to do?
What trade has been considered?
AS ALWAYS THE DECISION IS YOURS!
An Important Note: That any suggestions for options trade considerations require investors/traders to use their own discretion as to when to enter or exit! As well, it is advisable to do further research and due diligence before executing your trade.
It is sometimes best to exit a trade, if there is already sufficient profit accrued, before an earnings report is presented. GREED can be the undoing of a nice profit!