Microsoft (NASDAQ:MSFT), the PC-centric, old-tech giant trying like every other old tech company to make the tough transition to the Cloud, reports its fiscal Q1 '17 financial results after the bell on Thursday, October 20, 2016.
Street consensus (courtesy of Thomson Reuters)
|EPS est||y/y gro||Rev est||y/y gro|
|Q1 '17||$0.68||0%||$21.7 bl||1%|
- Street consensus as of 10/19/2016
- FY = fiscal year, July 1 through June 30
What was interesting about the fiscal Q4 '16 quarter was that even though revenue grew just 2%, MSFT guided lower on the PC business, just the opposite of what Intel (NASDAQ:INTC) did in the quarter, i.e. actually guiding higher.
Could Microsoft see a little boost from the PC business in the September 2016 quarter ?
Here is the table which has my attention:
|Prod & Biz||34%||32%||28%||29%||30%||30%||26%||28%|
Source: earnings reports, 10-Qs
Two trends jump out: The "Intelligent Cloud" revenue is growing as a percentage of the total with Azure growing consistently every quarter 90%-100%.
Second, note the jump in "More Personal Computing" in the holiday quarter every year. Bill Belichick notwithstanding, Microsoft is still riving sales in the critical retail shopping season. Tablet driven?
Intelligent Cloud is the future so readers need to continue to see that second line continue to gradually grow as a percentage of the total.
In my opinion, this may be the most interesting chart in the S&P 500: an old-tech giant leader - a growth-baby from the 1990s - poised to break out to an all-time high once again.
We haven't seen that too much.
The above chart has Microsoft's old-time high at $53.81 in January 2000. I checked this level with a couple of technicians I trust and they agreed with the January 2000 high.
Other technicians have taken umbrage with the $53.81 high tick, and say that the old high was near $59.
Either way, a trade into the $60 area on decent volume would be a significant breakout for the old software giant.
Does Q1 '17 have the potential to drive the stock higher?
Looking at the above table consensus for 2017 and 2018, paying 20(x) earnings for 4% EPS growth and 2% revenue growth isn't that attractive.
Listen for this on the conference call:
- Guidance for Q2 '17 (holiday quarter, Belichick impact on Tablet biz) and fiscal 2017.
- Margin guidance: Microsoft management said that gross margins should expand with the Cloud which is actually somewhat different than what some of the other old-tech giants are experiencing. Hopefully, MSFT can pull it off.
- The $113 billion on the balance sheet as of June 30 is still old news. Given the current state of the election expectations, it remains unlikely that meaningful tax reform will see any of this repatriated.
- Any meaningful comments in Azure, the Commercial Cloud and the traction therein can move the stock.
Unlike a lot of old-tech giants, MSFT is giving investors 10%-12% EPS growth and mid-single-digit revenue growth as Satya Nadella transitions the business.
Microsoft and Azure is the #2 player in the cloud to Amazon's (NASDAQ:AMZN) AWS.
Frankly, I think Satya and the team are making the right changes. MSFT management has stated that their Cloud revenue goal (for now) is $18 billion and as of the June 2016 quarter that run rate was $12 billion so there is more highway ahead.
Disclosure: I am/we are long MSFT, AMZN.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.