PC slowdown shouldn’t hurt Microsoft’s revenue, and here’s why

The slowdown in personal computer sales due to supply chain issues in recent months is said to have hurt Microsoft Corp. in recent years, but the company’s backbone to cloud computing and cloud software is expected to isolate it from any impact on profits.

Microsoft MSFT,
-0.51%
is expected to release its first quarter tax results on Tuesday afternoon, as it rolls out its new Windows 11 operating system and PC makers struggle to ship new machines. While Bill Gates and Steve Ballmer’s Microsoft would have faced a lot of pessimism on Wall Street if PC shipments were crippled and a new operating system wasn’t adopted quickly, Satya Nadella’s Microsoft should go very well.

Indeed, analysts and investors are primarily focused on Azure, Microsoft’s cloud response to Amazon.com Inc.’s AMZN,
-2.90%
Amazon Web Services, as well as cloud software offerings, diminishing the importance of Microsoft’s PC business.

“Sustained momentum in digital transformation is expected to offset the impact of estimates of mixed PC unit shipments from IDC and Gartner,” Morgan Stanley analysts wrote in an overview of the report, later adding: ” While our negative growth outlook for Windows OEMs puts pressure on our longer-term earnings expectations. For Microsoft, we also note that Windows OEM overall represents a declining combination of Microsoft’s overall revenue and gross margin.

Read: Why Amazon and Microsoft won’t have cloud computing forever

Azure has ensured that the importance of Windows to Microsoft has diminished. The fast-growing cloud business tops all analyst ratings on Microsoft, and analysts expect revenue growth of around 40%. (Microsoft is not disclosing Azure performance other than winning percentage, despite AWS and Google GOOGL,
-3.04%

GOOG,
-2.91%
Cloud providing full revenue and operating profit for their competitive services).

“Fundamentally, the increased contribution from previously signed long-term Azure agreements, continued cloud migrations after COVID, Microsoft’s increased focus on cloud verticalization, and strong growth in Microsoft 365 workstations can support a longer-term sustainable Azure growth, ”Morgan Stanley analysts wrote.

There are some factors that could be contributing to Microsoft’s growth as well, especially in forecasting. The $ 19.7 billion acquisition of healthcare company Nuance is expected to be finalized before the end of the calendar year, and Microsoft recently revealed that its cloud-based revenue will be dumped in the same income compartment as Azure.

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While Microsoft has not disclosed exactly what it will mean, analysts at UBS said in September that earlier disclosures from Nuance and a call they had with the company’s investor relations team made them feel bad. led to estimate that approximately 46% of Nuance’s revenue would be cloud-based. They estimated this would represent around $ 91 million in additional sales for Microsoft’s cloud division in the fiscal second quarter, if the full quarter were to be included.

Another bump could come in the future from price increases for Microsoft’s most popular cloud-based software offering, Office 365. Microsoft is increasing prices by more than 10% across the product, which the company has. described as “the first substantial price update since we launched Office 365 ten years ago,” which also gives analysts confidence that Microsoft can withstand all supply chain pressures on the market. PC market.

What to expect

Earnings: Analysts on average expect Microsoft to report earnings of $ 2.08 per share, down from $ 1.82 per share a year ago. Contributors to Estimize – a crowdsourcing platform that brings together estimates from Wall Street analysts as well as buy-side analysts, fund managers, business executives, academics and others – are planning a earnings of $ 2.22 per share.

Returned: Analysts on average modeled sales of $ 43.93 billion, which would be an improvement from $ 37.15 billion a year ago, after Microsoft forecast revenues of 43.3 to 44.2 billions of dollars. Estimize contributors expect revenue of $ 44.88 billion.

Analysts expect $ 16.52 billion in sales from the “Intelligent Cloud” segment, after Microsoft has guided $ 16.4 billion to $ 16.65 billion; $ 14.67 billion in revenue for the “Productivity and Business Solutions” segment focused on cloud software, following a forecast of $ 14.5 billion to $ 14.75 billion; and $ 12.72 billion from “More Personal Computing,” after sales forecasts of $ 12.4 billion to $ 12.8 billion.

Movement of stock: Microsoft shares fell in the session after the results were released in four of the past five quarters, although the latest decline was only 0.1%. The stock has risen 8.1% in the past three months and 45.2% in the past year as the S&P 500 SPX Index,
-0.11%
increased by 4.1% and 31.6% during those periods, respectively.

What analysts say

Analysts are fairly unanimous on Microsoft’s current position. According to the FactSet track, 33 out of 36 analysts rate the stock as the equivalent of a buy, while the other three rate it as an expectation.

“Currently trading at around 27 times our CY23 GAAP EPS estimate, Microsoft represents a rare combination of strong secular positioning and reasonable valuation in the software space,” wrote analysts at Morgan Stanley, who rate overweight stocks with a target of $ 331.

The concern once seemed to be the sustainability of the current growth path, which is why the acquisition of Nuance and the increase in prices of Office 365 are seen as the key to continuing to rise in inventory.

“The comps get progressively more difficult throughout FY 22, which should be met by the sustainable growth portfolio of Microsoft Azure / Security / Teams,” wrote analysts at Jeffries, who have an outperformance rating and recently raised their price target to $ 375 from $ 345. “The key things to watch out for are high expectations (high values ​​from Azure 40 are reported), integration with Nuance, and increased investment in security. “

In depth: tech revenue boom is running out of steam as Apple and Amazon face the same issues everyone else

Microsoft has profited from the pandemic as businesses have relied on the power and software of cloud computing to keep teams connected while working remotely. But Microsoft Bull and Wedbush analyst Daniel Ives doesn’t see a return to the office as a sign that the boom is over.

“We believe Street’s vision to moderate cloud growth on the other side of this WFH cycle runs counter to the business activity that Microsoft sees in the field,” Ives wrote, with an outperformance rating and target price of $ 375, in a preview report. . “While we’ve seen the momentum of this backdrop over the past few years, we believe the transaction flow looks increasingly strong (the combined Office 365 / Azure agreements in particular) as we approach the end. ‘year 22, because we estimate that Microsoft is still only about 35% in penetrating its unmatched installed base on the cloud transition.

Analysts at Stifel, with a buy rating and price target of $ 325, concurred with the advice.

“We continue to believe that the pandemic is forcing organizations to step up the pace of their cloud migrations and that Microsoft remains a key beneficiary of these modernization spending, especially in a significant new momentum, as its large stack allows it to capture Tier 1 workloads before. out of reach, ”they wrote.

The average Microsoft stock price target on Friday afternoon was $ 335.47, about 8.5% above the going rate.

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