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Microsoft Earnings Preview: Cloud Business, Acquisitions Help Fuel Growth

Published 04/27/2021, 02:25 PM
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  • Reports Q3, 2021 results on Tuesday, Apr. 27, after the market close
  • Revenue Expectation: $41.04 billion
  • EPS Expectation: $1.78
  • Looking at Microsoft's (NASDAQ:MSFT) continually escalating share price, it’s obvious investors don’t see the tech giant's strong growth momentum, which was sparked by the outbreak of the pandemic in March 2020, being interrupted anytime soon.

    Microsoft Weekly Chart.

    The stock, after surging about 40% last year, is up another 17% this year, outpacing the gains of the benchmark NASDAQ Index, which rose 9% during the same period.

    The Redmond, Washington-based software behemoth has been a major beneficiary of lockdowns and the stay-at-home environment they triggered during the past year, when both corporate and individual reliance on technology surged, boosting demand for the devices and services Microsoft sells.

    These favorable conditions are likely to remain even through the gradual reopening of the economy after the vaccine rollout in the U.S. and European. The company is forecast to report a 27% jump in its earnings per share to $1.78 for the fiscal 2021 third-quarter, when compared with the same period a year ago. Sales are likely to increase by 17% to $41.04 billion, according to analysts’ consensus forecast.

    Due to this strong earnings momentum, all 25 analysts covering Microsoft have a buy rating on the stock, according to Tipranks. Their consensus, one-year price target is $288.08, an 11% boost from its Monday’s closing price of $261.55 a share.

    When a stock is trading near an all-time high going into an earnings report and investors are so bullish, it makes sense to be careful and look for the right opportunity to jump in. Microsoft, in our view, will be a great candidate to buy on any post-earnings weakness if that occurs. 

    Acquisition Spree

    There are many reasons to remain bullish on MSFT. The most important one is the company’s growing share in the cloud-computing market where it’s the second-largest provider after Amazon (NASDAQ:AMZN).  

    Growth in that division jumped 50% in the previous quarter as corporate clients accelerated a shift to the cloud during the pandemic, where they can store data and run applications via the internet. For more than three years running, revenue from Microsoft's Azure service has almost doubled each quarter.

    With cloud sales surging and the company’s legacy Office product continuing to produce hefty cash, MSFT’s recent acquisition spree is further opening up new growth opportunities. Early this month, Microsoft agreed to buy artificial intelligence company Nuance Communications (NASDAQ:NUAN). The all-cash deal is Microsoft’s second largest acquisition after its $26-billion deal in 2016 to buy professional network LinkedIn. Microsoft has undertaken more than 100 acquisitions in the past four years, according to data provider Dealogic.

    Microsoft CEO Satya Nadella believes Nuance will help the company to capture market share in tech applications for health care, where the use of artificial intelligence is exploding. “This is projected to be one of the fastest-growing infrastructure software revenue streams in history,” he said about Nuance’s expertise in clinical documentation.

    Bottom Line

    MSFT is well-positioned to expand its market share into new areas of the digital economy while maintaining its leading position with legacy software products like Windows and Office.

    This durable advantage will help the company achieve sustained double-digit growth in revenue, earnings per share and free cash flow, making it a reliable tech stock to own over the long term.

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