Microsoft will bat leadoff for Big Tech this week as the Seattle company holds its quarterly earnings call, scheduled for after market close Tuesday. The Q2 earnings will arrive amid a massive stock market rotation that has hammered mega-cap names in favor of smaller stocks in recent weeks. Investors will be watching closely if Microsoft, no stranger to lofty expectations, can continue delivering strong numbers for its cloud services—a crucial element of AI profitability in the near term. Similar questions loom large for Amazon, Meta, and Apple, which will follow Microsoft in reporting earnings later this week.
Unless these tech giants all wildly beat estimates, it’s unlikely earnings results will stop the rotation that is favoring small-caps and value-oriented sectors of the market, Baird’s Ted Mortonson told Fortune last week. Microsoft shareholders, however, have become accustomed to good news from CEO Satya Nadella and CFO Amy Hood.
Last quarter, the company reported earnings per share of $2.94, beating estimates by 1,200 basis points. It also beat revenue expectations by over $1 billion, though Hood’s guidance for this quarter ($64 billion) was weaker than expected.
Estimates from S&P Capital IQ have Microsoft beating that number and again posting earnings per share of $2.94, up from $2.69 in the same quarter last year. Microsoft shares, which were trading slightly below the $430 mark Monday afternoon, are up over 26% in the past year. Investors also benefit from a quarterly dividend, which increased to $0.75 per share last year.
Microsoft Azure in focus as cloud computing drives AI revenue
Bank of America recently increased its price target for the stock to $510, up from the previous mark of $480, after a round of calls with Microsoft partners. Commentary from those partners, the report said, remained consistent with a healthy quarter buoyed by the strength of cloud management software Azure, as well as the company’s Microsoft Office product mix and early traction for its Gen AI chatbot, Microsoft Copilot.
“Microsoft's product road map is unmatched,” one partner told BofA. "It is very strong in security and generative AI, which continues to drive a ton of customer interest.”
Like many of the other tech giants, Microsoft might become its own worst enemy when it comes to sustaining revenue growth from comparable quarters last year. CFRA Research’s Angelo Zino noted these top-line comparisons will become increasingly difficult in the second half of 2024.
“As long as that deceleration kind of is in line with where the market is expecting,” Zino told Fortune, “I think you should be okay.”
Microsoft’s Xbox revenue has jumped over 60% year on year in the past two quarters, according to an analysis of company reports by CNBC. The boost was largely thanks to the $75 billion acquisition of game developer Activision Blizzard, the maker of the popular Call of Duty franchise.
Analysts are more focused, however, on Azure. Its revenues grew 31% last quarter, the second-biggest jump among the company’s product and service categories. The “cloud outlook” for many of the tech behemoths is one of the most important trends in today's stock market, Zino said, particularly as investors seek details on how companies like Microsoft plan to monetize AI.
“Because as far as the cloud is concerned, there is kind of more immediate revenue potential from AI,” he said, noting other possible revenue streams lie further out.
Microsoft has emerged as one of the world’s leading providers of cloud infrastructure. Though Amazon Web Services still leads the pack with a market share of 31%, according to estimates from Synergy Research Group, Azure has moved into a close second at 25%. Alphabet’s Google Cloud, at 11%, is the only other provider in double digits.
