The Microsoft logo is illuminated on a wall during a Microsoft launch event
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Wall Street is beginning to murmur about the potential for better-than-expected results from Microsoft, due to report its earnings after the close of trading on Tuesday.
The Wall Street analyst consensus forecast calls for total revenue of $40.2 billion for the software company’s fiscal second quarter, with profits of $1.64 a share. Microsoft doesn’t provide guidance on revenue and profits, but it does offer an outlook for each of its three major business segments.
On the most recent quarterly earnings call, CFO Amy Hood said that Microsoft expects December quarter sales of $12.75 billion to $13 billion for Productivity and Business Processes, $13.55 billion to $13.8 billion in Intelligent Cloud, and $13.2 billion to $13.6 billion for More Personal Computing.
On Thursday, Evercore ISI analyst Kirk Materne repeated his Outperform rating on Microsoft shares, raised his target for the stock price to $260, from $250, and added the stock to the firm’s “tactical outperform list.” Inclusion implies there is potential for a move in the stock in the near term.
Microsoft shares were up 0.2% to $224.70 in morning trading.
Materne contends that the balance of risks and potential rewards looks increasingly attractive. He has “growing confidence in an improving IT spending backdrop for 2021,” he said in a research note. Materne said he sees the potential for Wall Street to raise its forecasts for earnings for the second half of the June 2021 fiscal year after the coming results disclosure.
“We expect Microsoft to deliver solid results next week despite lingering overhangs from Covid and tougher on-prem compares for [intelligent cloud] and [productivity and business processes].” he wrote. “Further, we believe that the potential reacceleration in the economy and easing compares for the commercial business set up a favorable scenario for potential upside when looking out to” the March and June quarters.
“When combined with the fact that Microsoft shares have been range bound since July and the relative premium versus the S&P 500 has shrunk by about 33% over that time, we believe the risk/reward associated with the stock when taking a 3-6 month view looks very attractive at these levels,” he said. The market hasn’t taken account of how the company could benefit as an economic recovery lifts information-technology budgets, and small and medium-size businesses start to spend again on tech initiatives, Materne wrote.
Meanwhile, Citi’s Walter Pritchard, who has an Outperform rating and $272 price target on Microsoft shares, said in a research note that he sees a “positive set-up around key top-line metrics” for Microsoft’s December quarter, with upside likely for the Azure cloud business in particular. He says that margin headwinds due to growth in gaming platform sales and tough comparisons on bookings are well understood, but he also expects strength in PCs that was not anticipated at the time the company made its forecasts.
Pritchard says that a continued recovery in IT spending is likely turning out to be better than had been anticipated three months ago, and should lift results in all three segments above what the Street expects, and what management has predicted.
Write to Eric J. Savitz at [email protected]
