What to Look For From MSFT

Key Takeaways

  • Analysts estimate adjusted EPS of $1.91 vs. $1.46 in Q4 FY 2020.
  • Microsoft Azure revenue is expected to rise sharply YOY, but slow compared to the year-ago quarter and to Q3 FY 2021.
  • Revenue is expected to rise as Microsoft moves to speed up growth through acquisitions.

Microsoft Corp. (MSFT) has embarked on an acquisition spree amid strong financial performance over the past year, buying up companies in healthcare, artificial intelligence (AI), and cybersecurity. In April, the company agreed to buy AI speech recognition firm Nuance Communications Inc. (NUAN) for $16 billion. Earlier this month, Microsoft said it agreed to pay more than $500 million for security software firm RiskIQ Inc. amid a rise in high-profile cyberattacks.

Investors will assess these deals’ longterm impact and the company’s latest financial performance when it reports earnings on July 27, 2021 for Q4 FY 2021. Microsoft’s fiscal year 2021 ended on June 30. Analysts expect robust year-over-year (YOY) growth in the company’s adjusted earnings per share (EPS) and revenue.

Investors will also focus on YOY revenue growth in Azure, which is a key component of Microsoft’s cloud computing business that offers a comprehensive set of services to developers, IT professionals, and enterprises. Analysts expect strong growth in Azure revenue, albeit at its slowest pace in at least the past four years.

Microsoft’s shares have outperformed the broader market over the past year, but that outperformance only began in late June of 2021. The stock kept pace with the market from mid-July 2020 untill about early November 2020. After that, it mostly underperformed until mid-to-late June 2021. Shares of Microsoft have provided a total return of 44.4% over the past year, above the S&P 500’s total return of 36.4%.

Source: TradingView.

Microsoft Earnings History

The stock sank after Microsoft reported financial results for Q3 FY 2021 despite beating analysts’ earnings and revenue estimates. Adjusted EPS rose 39.4% compared to the year-ago quarter. Revenue grew 19.1% YOY. It was the fastest pace of growth for either metric in at least 17 quarters. The company noted that digital adoption was continuing to accelerate amid the ongoing COVID-19 pandemic as increasing numbers of businesses move their operations to the cloud.

Microsoft also beat analysts’ earnings and revenue expectations for Q2 FY 2021. Adjusted EPS rose 34.1% YOY, continuing an acceleration trend that began in the previous quarter. Revenue grew 16.7%, its fastest pace since Q1 FY 2019. The company highlighted the role its comprehensive cloud platform was playing in the acceleration of the digital transformation noted above.

Analysts expect Microsoft’s strong financial performance to continue in Q4 FY 2021, albeit slower than Q3. Adjusted EPS is expected to rise 30.7% as revenue expands 16.4% compared to the year-ago quarter. For full-year FY 2021, analysts forecast that adjusted EPS will rise 34.1% as annual revenue climbs 16.2%. That would be the fastest pace for either metric in at least six years.

Microsoft Key Stats
  Estimate for Q4 2021 (FY)  Q4 2020 (FY) Q4 2019 (FY)
Adjusted Earnings Per Share ($) 1.91 1.46 1.37
Revenue ($B) 44.3 38.0 33.7
YOY Growth in Microsoft Azure Revenue (%) 43.1 46.7 63.5

Source: Visible Alpha

The Key Metric

As mentioned above, investors will also focus on revenue growth in Azure, which forms, along with services like SQL server and Visual Studio, a part of Microsoft’s Intelligent Cloud segment. Azure is a cloud platform that offers developers, IT professionals, and enterprises a suite of tools and services that can be used for networking, storage, mobile and web application services, AI, Internet of Things (IoT), and a range of other computing needs. It captured an approximately 20% share of the $150-billion global cloud market as of the end of Q1 2021. Microsoft’s Azure is second only to Amazon.com Inc.’s (AMZN) Amazon Web Services in terms of global cloud market share. Azure is expected to benefit from another recent acquisition by Microsoft: AT&T Inc.’s (T) Network Cloud technology. AT&T will still operate its network, but Microsoft will be handling the wireless carrier’s 5G cloud operations.

Azure has become an important driver of growth at Microsoft in recent years, outpacing the company’s overall revenue growth. Despite that superior performance, the pace of growth has slowed. Azure’s annual revenue grew 115.5% in FY 2016 and decelerated in each year since then, slowing to 56.3% in FY 2020. In Q1 FY 2021, Azure’s quarterly revenue continued that trend, increasing at a YOY pace of 44.9%. However, that growth began to accelerate again, rising by 47.2% YOY in the second quarter and by 50.4% YOY in the third quarter. Analysts expect Azure revenue to grow 43.1% in Q4 FY 2021, breaking the acceleration trend but still a robust pace. For full-year FY 2021, analysts forecast Azure revenue to grow 45.2% to $29.6 billion. If analysts are correct in their estimates for Azure and companywide revenue, Azure would account for approximately 18% of Microsoft’s total revenue.