North America

Earnings Preview: Microsoft Q4 2018 (MSFT)

By: Craig Bowles

Overview

Microsoft, Corp. (MSFT) is slated to report 4Q2018 earnings after the close on Thursday, July 19th. The earnings release is expected a couple of minutes after 4:00 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 $1.08 (range $1.03 to $1.13). (Source: Yahoo! Finance) Consensus was $1.00 three months ago.
  • Revenues: Company guidance from the conf call was $28.8 bln to $29.5 bln. Analysts expect an increase of 18.2% y/y to $29.21 bln.
  • Price/Earnings of 70.9 compared to a 5-year average of 23.8; P/Book 10.2 compared to a 5-year average of 5.1, P/Sales 8.2 compared to a 5-year average of 4.7, and P/Cash Flow 18.8 compared to a 5-year average of 13.7. Dividend yield of 1.6% compared to a 5-year average of 2.3%.
  • Analysts view Microsoft with 29 (28 last qtr) Buy, 4 Hold, and 1 Sell ratings. (source: MarketBeat.com)
  • Insider sold 13,784 shares during the last three months and 7,229,432 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 2.69%. Options are pricing in an implied move of 3.56% off earnings.

 Recent News

  • 7/17: Walmart signed a five-year deal to use Microsoft’s cloud and artificial intelligence technology. Microsoft has reportedly been working on a technology that could eliminate cashiers and checkout lines from stores, according to a post on CNBC.com.
  • 7/16: Microsoft’s sales overhaul a year ago has led to all-time high stock price and continuing cloud growth, according to a post on CNBC.com.
  • 7/12: Microsoft announced that it’s launching a free version of its Teams software. Slack with a similar service currently has around 8 million daily users, 3 million of whom are paid subscribers, according to a post on qz.com.
  • 6/27: Microsoft launches two new Azure regions in China, according to a post on Techcrunch.com.
  • 6/25: Amazon has hired at least 30 executives from Microsoft in the years between 2015 and 2017, according to a post on CNBC.com.
  • 6/16: Microsoft’s Project Natick is testing a submersible cloud data center. The company hopes to deploy underwater data centers in less than 90 days, down from two years for land-based data centers, according to a post on Barron’s.
  • 6/04: Microsoft will acquire Github, the privately held, San Francisco-based code repository of open-source software projects, for $7.5 billion in Microsoft stock, according to a post on Barron’s.
  • 5/01: BMO Capital has an Outperform rating on Microsoft but says the company is weak in cloud apps and suggests a large acquisition in the realm of cloud-computing software, according to a post on Barron’s.
  • 3/29: Microsoft reorg (don’t forget executive reshuffling was announced earlier this year), according to a post on Businessinsider.com.

Summary

Microsoft stock has led the overall market higher since mid-2016 and has made new highs in 2018 while the general market struggled. Increased revenue expectations seem to be driving the stock higher despite valuations appearing stretched. If you’re looking for a stock with valuations double their 5-year averages late in the cycle, look no further. Analyst are slightly even more bullishness than last quarter and insider selling has slowed the past nine months despite a tick up the last week. Over the past year, Microsoft has beaten analyst consensus by an average of 10c the past three quarters and by 35c in the year-ago quarter. Estimize consensus for an EPS (or adjusted EPS) of $1.11 on revenue of $29.392 bln compares to analyst consensus of $1.08 on revenue of $29.21 bln.

 

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