Microsoft Prepares To Release Earnings: Can It Remain The Cloud King?

The largest company in the world by market cap is reporting earnings Wednesday, October 23rd, after the bell in one of the most anticipated September quarter releases. Investors and traders have driven MSFT up over 36% this year. Microsoft (MSFT - Free Report) ostensibly represents the cloud and software industry in the US, and it is booming. Microsoft analysts have big expectations for its September quarter (fiscal Q1) results.

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Zacks Consensus estimate consists of an EPS of $1.25 on revenues of $32.23 billion, which would represent year-over-year growth of 10% and 11%, respectively. MSFT is not typically a big mover on earnings but has had a positive price impacts following earnings for the past 8 consecutive quarters, averaging a 2.2% upside.

Microsoft has transitioned its topline to one that is primarily subscription-based, a business model that is being utilized across the tech sector. Their primary revenue drivers are subscription-based Microsoft Office, Microsoft Windows as well as on-premise server products, but cloud computing is the future of this firm.

The Cloud

Microsoft’s new cloud computing technology, Azure, has investors in a frenzy attempting to value this proliferating segment. Since Azure was initially launched back in 2011, this company’s forward P/E has more than doubled as investors evaluate the potential of this new technology.

Corporations across the world are quickly shifting from on-premise servers to less costly and more easily accessible cloud computing. Amazon’s AWS launched 13 years ago and has proven the cloud computing business model. Today AWS makes up more than 50% of this almost trillion-dollar online retailer’s profits.

Azure has seen triple-digit to high double-digit growth figures since it gained traction back in 2015. These growth rates far outpace that of AWS, and the rest of the commercial cloud space as Azure takes progressively more market share. Microsoft’s commercial cloud revenue just took the cloud crown from Amazon, and at its current growth rate, I don’t see MSFT being usurped any time soon. The main concern that investors have with this segment is its ability to turn a profit. At Azures comparable stage in adaptation, AWS had already attained operating profit margins north of 20%.

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