Can earnings boost Microsoft (MFST) stock? – October 21, 2022

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Microsoft (MSFT Free Report) The October 25 first quarter fiscal 2023 earnings release will be one of the most watched in a busy week full of big tech reports.

The software titan is one of the leading tech stocks due to its diverse technology products which include cloud services, server applications, business solutions, management tools, and video games. Trading at 31% from its highs, it will be important to see whether Microsoft has been able to sustain growth in the majority of its business segments.

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Last quarter, Microsoft said it expects double-digit revenue and operating profit growth in FY23. Investors were pleased with the outlook, even though the company has mentioned that forex (FX) volatility could slightly reduce total revenue growth, cost of goods sold (COGS), and operating expense growth.

Currency headwinds aside, Wall Street will be watching Microsoft’s earlier outlook that weak PC market demand and lower ad spend will impact Windows OEM, Surface and LinkedIn.

Acquisitions and cloud growth

Acquisitions have helped drive Microsoft’s growth, the company has shown its ability to acquire popular companies like LinkedIn and many others over the years. Investors hope that LinkedIn can continue to boost Microsoft’s revenue and that operating costs can be contained.

LinkedIn revenue last quarter increased $3.5 billion year-over-year, up 34%. This is due to a dynamic job market and strong advertising demand in its Marketing Solutions business. It will be important to see if this can continue with many social media companies such as Meta Platforms’ (META Free report) Facebook also warns of slowing ad spending.

Investors will also be looking for confirmation of the expected closing of the deal with Activision Blizzard. At this time, Microsoft’s guidance for FY23 does not include any impact from Activision Blizzard. Microsoft expects the $68.7 billion acquisition to close by the end of FY23.

Microsoft hopes Activision Blizzard can provide additional revenue streams to support LinkedIn and its growing Azure cloud technology. In its most recent quarter, Microsoft Cloud Services generated $25 billion in revenue, up 28% year-over-year. The company has seen strong demand, gained market share and increased customer engagement with its cloud platform.

It will be important to see whether Microsoft has been able to continue to take market share in cloud services from other big tech competitors like Amazon (AMZN Free Report) and Alphabet (GOOGL free report). Despite Azure’s year-over-year growth, it slowed from the previous quarter and missed analysts’ expectations last quarter.

First fiscal quarter outlook

Zacks’ consensus estimate for MSFT’s fiscal first quarter earnings is $2.30 per share, which would represent a 1% increase from the first quarter of 2022. Sales for the quarter are also expected to increase by 9 % at $49.57 billion. However, it is important to note that estimates for the quarter fell last week and are below expectations of $2.44 per share at the start of the quarter.

Year-over-year, MSFT is expected to show earnings growth of 8% in FY2023 and FY24 earnings are expected to grow an additional 15%. Solid revenue growth is also expected, with FY23 sales expected to climb 10% and another 13% in FY24 to $247.57 billion.

Performance & Valuation

Year-to-date, MSFT is down -28%, close to the -24% decline of the S&P 500. However, over the past decade, MSFT has risen +760% to crush the benchmark. Investors are hopeful that MSFT can regain its dominant performance despite a tougher operating environment.

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Trading around $242 per share, MSFT has a P/E of 23.4X. This is close to the industry average and well below its decade high of 37.4X and close to its median of 23.2X. MSFT is trading at a discount to its past, but an earnings overshoot and reaffirmation of guidance for FY23 will be key for investors in the current unfavorable market conditions for tech stocks.

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Image source: Zacks Investment Research

Conclusion

Despite missing fiscal fourth quarter earnings expectations, MSFT stock rallied after the quarterly report as investors grew optimistic about its better-than-expected FY23 outlook. With earnings estimate revisions trending lower throughout the quarter, much of the optimism began to fade. Wall Street wants to see Microsoft deliver strong first-quarter results and, more importantly, reaffirm its guidance for FY23, as the economic slowdown and operating environment have deteriorated since the company announced its outlook.

MSFT currently lands a Zacks No. 4 (sell) rank in correlation with downward revisions to earnings estimates for the current quarter, fiscal year 2023 and fiscal year 24. Microsoft’s computer software industry also makes part of the bottom 48% of more than 250 Zacks industries.

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