Microsoft Corp. will publish fiscal year 2022 third-quarter financial results after the close of the market on Tuesday, April 26, 2022.
Microsoft stock has continued to languish near its recent March bottom, despite suffering its most significant decline since the COVID bear market. Notably, MSFT stock remained almost 20% below its November highs, even asthe King of SaaS fell into a bear market recently.
Microsoft may report strong 3Q cloud results that more than offset any potential weakness in consumer PCs. The recent rise in global inflation data and geopolitical concerns in Europe will likely hamper consumer demand for new electronics.
Though it isn't expect commercial PCs to have an impact in 3Q, it's possible that enterprises push out upgrade plans in 2H which could hurt demand for Windows, as well as on-premise Server software products.Microsoft also has to deal with a brewing antitrust issue relating to Azure's business practices.
Office 365 could be another product category that may start experiencing some slowdown in growth, as enterprises shift focus from front-office cloud applications to back-office.
PC Headwinds Exacerbated Near-Term Challenges
Tech stocks have continued to come under pressure given the surging inflation and interest rate hike challenges. As a result, Microsoft stock was also impacted. In addition, the recent headwinds relating to normalization in consumer demand in the PC market also impacted Microsoft stock.
A recent IDC report showed that PC shipments declined 5.1% YoY worldwide in CQ1. But, the difficult comps were not unexpected, given the pandemic boom driving remote working and classes. Furthermore, shipments remain robust, as IDC accentuated (edited):
The focus shouldn't be on the YoY decline in PC volumes because that was to be expected. The focus should be on the PC industry managing to ship more than 80M PCs at a time when logistics and supply chain are still a mess, accompanied by numerous geopolitical and pandemic-related challenges. -Barron's
Still, the impact concerned the Street, as UBS highlighted (edited): "Office 365's 'high penetration'and benefits from the pandemic and work-from-home boom are starting to fade, and could also impact Windows. Our estimates are trimmed to reflect a higher risk of a PC growth slowdown. Management's guidance for the June quarter could be lower than the Street's estimates."
Cloud Business Should Mitigate Impact
Therefore, the impact on MSFT stock seems to be justified as the market attempts to price in these near-term concerns. However, investors should also consider the higher level of corporate IT spending, and the continued shift to the cloud should mitigate weaker consumer spending.
A recent Bloomberg survey demonstrated that CTOs expect to spend more in 2022, mainly on cybersecurity and cloud computing. Notably, "61% of respondents say they expect to increase their tech spending. Of those, 72% will likely increase their budgets by 9% or more this year." Furthermore, 62% of the respondents indicated that they intend to increase spending with Microsoft, just below AWS' (AMZN) 64%.
Furthermore, Synergy Research Group also accentuated it expects global hyperscale data centers to surpass 1K in 2024, from 500 in 2018. It added (edited): "The future looks bright for hyperscale operators, with double-digit annual growth in total revenues supported in large part by cloud revenues that will be growing in the 20% to 30% per year range."
Nevertheless, we also shifted our attention to antitrust concerns on Azure's business practices that were flagged recently. Bloomberg reported that Microsoft has been using its clout and leadership in its Windows and Office suite to lock in customers to Azure or risked paying more.
Notably, these concerns have also drawn the attention of the EU regulators (Although Microsoft could have lesser political clout).
However, we have not noticed similar attention emanating from the US regulators yet. Interestingly, a WSJ report in early April discussed how Microsoft has "adroitly" maneuvered and "endeared" itself with US lawmakers. Still, it's still too early to determine whether the attention on Microsoft's Azure business could attract the attention of the US antitrust regulators. But, Microsoft's ability to navigate itself in the US has been pretty "impressive."
Analyst views
Two analysts remained bullish despite slashing their price targets on Microsoft.
Citigroup analyst Tyler Radke maintained Microsoft with a Buy and lowered the price target from $386 to $355 (24.8% upside).
Amidst rising investor concerns around the sustainability of robust software demand and valuation multiples, Citi analyst Tyler Radke expects MSFT's results to demonstrate that commercial demand remains strong.
While the March/FQ3 saw weaker PC data and potential incremental FX headwinds, Radke saw strength in MSFT's key commercial selling areas, including O365 and Azure, based on the results of Radke's proprietary reseller survey and intra-Q channel work.
Radke expects that Q3 results should continue to show the durability of MSFT's double-digit growth profile.
Wells Fargo analyst Michael Turrin maintained Microsoft with an Overweight and lowered the price target from $425 to $400 (40.6% upside).
Microsoft's Productivity & Business Processes segment has quietly delivered an uptick in growth across each primary business, benefiting from one of the most significant shifts in the history of business users, raising doubts regarding a possible slowdown.
Turrin saw the NT optics around second-half growth rates, which were likely to moderate.
He saw Microsoft's dominant position continue to provide a broad base for natural LT cross-sell opportunities somewhat under-appreciated.
He continued to see MSFT shares as the best way to play the broad secular LT shift towards digital, with platform positioning esp. advantageous in the current environment, and take a closer look at Office, LinkedIn, and Dynamics.
Microsoft makes Goldman list of strong software stocks.
It’s “probably one of the most resilient earnings stories in the technology industry and across sectors,” the analysts said.
“The combination of continued operating leverage, as its cloud business reaches about a $90 billion run-rate, and sustainable earnings-per-share growth should drive a potential doubling of earnings per share from fiscal 2022 to fiscal 2027.”
In addition, “Microsoft is an efficient capital allocator, as evidenced by a successful track record of acquisitions, dividends and share purchases,” the analysts said. "[That] argues for a compelling total return story.”
Microsoft's revenue in the third quarter of fiscal year 2022 is expected to be $49.131 billion, the adjusted net profit is expected to be $16.565 billion, and the adjusted EPS is expected to be $2.189, according to Bloomberg's unanimous expectation.
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