North America

Earnings Preview: Microsoft Q3 2018 (MSFT)

By: Craig Bowles

Overview

Microsoft, Corp. (MSFT) is slated to report 3Q2018 earnings after the close on Thursday, April 26th. The earnings release is expected at approximately 4:05 p.m. ET with a conference call to follow at 5:30 p.m. that is webcast through Microsoft Investor Relations. A member of the Dow Jones Industrial Average, Microsoft has significant market influence and the potential to impact the broader market gauges.

Outliers & Strategy

Key measures:

  • Adjusted Earnings Per Share (EPS) / Non-GAAP Earnings Per Share (EPS): (If unavailable, GAAP Earnings Per Share (EPS) would be comparable to consensus.) The Street estimate is $0.85 (range $0.79 to $0.91). (Source: Yahoo! Finance) Consensus was $0.78 three months ago.
  • Revenues: Analysts expect an increase of 9.4% y/y to $25.77 bln (range $25.58 bln to $26.35 bln).
  • Price/Earnings of 75.7 compared to a 5-year average of 23.8; P/Book 9.1 compared to a 5-year average of 5.1, P/Sales 7.6 compared to a 5-year average of 4.7, and P/Cash Flow 17.3 compared to a 5-year average of 13.7. Dividend yield of 1.7% compared to a 5-year average of 2.3%.
  • Analysts view Microsoft with 28 Buy, 6 Hold, and 1 (2 last qtr) Sell ratings. (source: MarketBeat.com)
  • Insider sold 67,011 shares during the last three months and 22,271,812 shares in the past year. (source: NASDAQ.com) The company approved another $40 bln stock buyback program that began in 2017.
  • Microsoft is compared to other software and service companies with quarterly results possibly impacting Apple (AAPL), Google (GOOGL) and Oracle (ORCL).
  • Microsoft shares have shown a 1-day average price change on earnings of 3.38%. Options are pricing in an implied move of 4.51% off earnings.

Recent News

  • 4/18: Microsoft’s OneNote for Windows 10 to become the default Windows version later this year when Office 2019 launches, according to a post on zdnet.com.
  • 4/17: The U.S. Supreme Court dropped Microsoft’s privacy fight with the Justice Department over whether prosecutors can force technology companies to hand over data stored overseas, according to a post on Reuters.
  • 4/17: Bank of America has a Buy rating on Microsoft noting that the expanding cloud business could add between $3 and $4 in EPS by 2025. Azure’s revenue growth rate is over twice that of Amazon’s AWS, according to a post on US News and World Report.
  • 4/16: Microsoft introduced Azure Sphere which uses Linux to secure chips in gadgets that are currently not connected to the web, according to a post on arstechnica.com.
  • 4/16: The Office of the U.S. Trade Representative is considering a new complaint against China to retaliate for restrictions on high tech sectors, like cloud computing. In China, U.S. cloud-computing firms, like Amazon and Microsoft, must operate jointly with Chinese companies and license their technology to the Chinese partners, according to a post on CNBC.com.
  • 4/08: Microsoft’s Teams product is a communications tool often compared to Slack and team-wide threaded communications (Yammer) was given redoubled investment and attention last year, according to a post on Techcrunch.com.
  • 4/04: Microsoft will expand its cloud services in Europe and the Middle East. IDC estimates that global spending on public cloud services will more than double by 2021, according to a post on Fool.com.
  • 3/29: Microsoft announced plans to split up its Windows engineering team and that the leader of its Windows business is leaving, according to a post on NYTimes.com.
  • 3/26: Morgan Stanley wrote, “Strong positioning for ramping public cloud adoption, large distribution channels and installed customer base, and improving margins support a path to $50 billion in EBIT and a $1 trillion market cap for Microsoft, according to a post on CNBC.com.

Summary

Microsoft stock has led the overall market higher since mid-2016 and is already retesting the March high ahead of earnings. Increased revenue expectations seem to be driving the stock higher despite valuations appearing stretched. Analyst bullishness remains and not sure why but insider selling slowed dramatically in the past six months. Over the past year, Microsoft has beaten analyst consensus by an average of 14c the past four quarters. Estimize consensus for an EPS (or adjusted EPS) of $0.89 on revenue of $25.901 bln compares to analyst consensus of $0.85 on revenue of $25.77 bln.

 

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