Microsoft earnings: expectations are what matters, so be patient

The most important financial news to be presented by Microsoft Corp executives on Tuesday requires a bit of waiting.

Microsoft MSFT,
-0.59%
Financial results for the fourth quarter of the fiscal year are due after the bell, to conclude another record year for earnings and revenue, with annual earnings expected to increase approximately 20%, and sales expected to post a gain of approximately 18%. Most of the drama in the numbers was removed when Microsoft executives warned in early June that earnings would come in less than expected, with about a month left in the quarter.

While this reduction in guidance was linked to a stronger dollar, there are several scary indicators for Microsoft. With third-party analysts reporting that PC shipments posted their biggest decline in years during the quarter and business customers that Microsoft depends on point to a spending slowdown, there will be more palms than usual awaiting Microsoft’s results.

“As the quarter approaches, investors are understandably concerned about the multiple cross-currents that are likely to affect Microsoft’s results and outlook for FY23: lower PC shipments putting pressure on Windows OEM results, FX headwinds, weak Consumer and macro vulnerabilities in general, all act as potential risks,” Morgan Stanley wrote in a preview of the report last week.

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It is likely that the answers to investors’ questions will not arrive with the announcement of the results in the press release. The most important information Microsoft will provide is its forecast, which executives keep for the subsequent conference call – scheduled for 5:30 p.m. ET – and present them in parts after CEO Satya Nadella delivers his quarterly address on “digital transformation” and chief financial officer Amy Hood separates Announced quarterly results.

In each of the past two quarters, Microsoft’s stock has fallen into the red after the company reported strong numbers, and then turned green after providing forecasts nearly two hours later. We’re expecting a lot from Tuesday itself, as investors await news about what Microsoft executives expect in the upcoming fiscal year.

what are you expecting

gains: Analysts on average expect earnings of $2.29 per share, according to FactSet, down from $2.33 per share before Microsoft revised its forecast. That would still be an increase from the $2.17 per share reported in the fiscal fourth quarter a year ago.

Estise, which garners forecast sources from hedge funds, academics and others, has an average appreciation of $2.34 per share.

he won: Analysts expect average sales of $52.39 billion, according to FactSet, down slightly from $52.9 billion before the revision. Estise contributors expect an average of $52.85 billion. Microsoft reported revenue of $46.15 billion in the fourth quarter of last year.

stock: Microsoft shares are up after the past three earnings reports, after a series of declines in four out of five post-earnings trading sessions. Stocks don’t tend to move wildly in either direction, however: The stock hasn’t moved more than 5% on the day after earnings in the past 14 quarters.

The stock is down 23% so far in 2022, as of the end of Monday’s trading session, while the S&P 500 SPX,
+ 0.13%
It was down 16.1% and the Dow Jones Industrial Average DJIA,
+ 0.28%
– which Microsoft considers as a component – decreased by 12.2%.

What the analysts say

Morgan Stanley analysts, who have a plus rating with a price target of $354 and call the stock “one of our favorite things about software,” put together three things Microsoft needs to do to overcome current concerns.

First, Microsoft needs to make sure that Azure, its cloud computing product, withstands economic turmoil. They’re looking for 47% growth in constant currency in the fourth quarter, which CFO Hood directed in the latest report, and guidance that this number stays at least in the lower 40s in the first quarter. (Microsoft only provides the percentage revenue growth figure for its cloud product, though competitors Amazon.com Inc. AMZN,
-1.05%
and Alphabet Inc. Google,
-0.36%
GOOG,
-0.14%
Offer a full breakout of their similar products.)

More info: ‘People are going to freak out’ – the cloud boom is back on Earth, and it could be scary for tech stocks

Second, they believe that Microsoft needs to “eliminate risks related to FX expectations, PCs, and the weak consumer,” without offering many insights into how executives might achieve this feat. Third, they believe Microsoft executives need to maintain their guidance for double-digit growth in operating income, although they would accept if executives added the caveat that it would only be in “fixed currency,” strengthening the dollar.

“The addition of the ‘fixed currency’ rate to the fiscal year 23 suspension is likely to be seen as a constructive outcome for investors and cements Microsoft’s position as the most stable vessel in the stormy seas of software,” they wrote.

Wedbush analyst Dan Ives agrees with Morgan Stanley analysts that Azure growth is Microsoft’s number one priority, amid doubts that the strong growth rates of recent years can continue into a potential recession.

“We believe that with total storm clouds on the horizon, all focus will be on Nadella’s comments and guidance on Azure growth heading into fiscal year 23, which we believe is the line in the sand north of 40% as a street gauge going into fiscal year 1,” he wrote in a preview , while maintaining a superior rating and a price target of $340.

Jefferies analyst Brent Thiel believes foreign exchange rates will “have a more pronounced impact on the F1Q guidance,” as the dollar has continued to strengthen since Microsoft revised its guidance in early June. He expects guidance to be conservative as a result, but maintains his buy rating and $320 price target even while acknowledging that “valuation remains 23.5x high”.

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While there are concerns about Microsoft’s ability to continue to post strong Azure growth rates and macroeconomic issues along with declining PC sales, most analysts believe the company will be fine even if those concerns prove valid in the coming months.

Deutsche Bank analyst Brad Zelnick wrote, “Microsoft continues to rate it as the top name in our coverage at reasonable price to quality which should prove to be a comparative advantage in the current environment,” while maintaining its buy rating. “Much of our fieldwork indicates that IT spending is beginning to weaken, and we believe that if the environment is difficult for Microsoft, it will likely be more difficult for most others.”

None of the 44 analysts covering Microsoft who track FactSet have rated the stock for sale. Only two of the shares are held while the other 42 all have a buy rating or equivalent on the stock. The average target price as of Monday afternoon was $339.84, implying an implied rally of more than 31% from the current price.

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