Microsoft Corp. is expected to maintain. its consecutive profitable quarters on the solid strength of its cloud business when the company reported earnings on April 26th.
Microsoft’s cloud services have pushed much better than the company’s expected revenues and revenue results over the past four quarters, and analysts expect an encore in the company’s upcoming third quarter fiscal report. company due to the continuous acceleration of digital innovation in many businesses.
“Microsoft continues to represent a rare combination of strong secular positioning and reasonable valuation based on profitability within the software space,” said Keith Weiss, an equity analyst at Morgan Stanley.
For its fiscal third quarter that ended in March, Microsoft is expected to post revenue of $ 49.05 billion, up 17.6% from the previous quarter, according to S&P Global Capital IQ estimates.
The cloud grows
Microsoft’s Azure cloud platform has been the backbone of growth for the company amid the COVID-19 pandemic. As a result, the company’s Intelligent Cloud segment, which includes a variety of products including Azure, continues to be Microsoft’s top-performing segment.
After several quarters of 50% year-over-year growth for Azure during the pandemic, its gains dropped slightly to 46% in the most recent quarter. Azure’s year-on-year growth rate is expected to remain at 46% during March.
Azure’s growth rate is supported by digital transformation initiatives as companies increasingly turn away from legacy apps in favor of cloud-based offers from providers like Salesforce Inc., ServiceNow Inc. at Workday Inc. Expanding app installations, in turn, are supported. through services from Azure, Amazon Web Services Inc. and Google Cloud of Alphabet Inc., said John Freeman, vice president of equity research at CFRA Research.
“There’s a lot of fuel in the cloud transfer tank to drive most of that growth in Azure and other large cloud infrastructure providers,” Freeman said. “Competitively, there’s really no way a new entrant can reach the big size of the big three and become a player in the mainstream cloud market.”
Of the big three cloud providers, however, Microsoft is expected to gain the most market share over the next three years.
A Morgan Stanley survey of approximately 100 chief information officers across the U.S. and Europe found that 42% of respondents expect Microsoft to get the largest share of IT as a result of moving to the cloud, followed by Amazon at a distant No. 2 to 17 %.
The survey also found that 43% of respondents expect Microsoft to maintain its lead over the next three years.
Activision deal
Microsoft’s gaming division is also particularly notable, as its record $ 68.7 billion deal to acquire Activision Blizzard Inc. is faced with rising scrutiny.
The U.S. Federal Trade Commission is conducting an antitrust review for the deal, while the SEC and the U.S. Justice Department are investigating whether investors who know Activision CEO Bobby Kotick were involved in insider trading of the video game company’s stock. before the acquisition was made public.
The high level of attention to regulation makes it more vulnerable to dealing with failure, which could potentially derail Microsoft’s plans to add Activision games to its Xbox ecosystem, including the Game Pass subscription service, says Freeman of the CFRA.
“The deal has a bigger question mark than I first thought,” Freeman said. “I have a feeling that if this continues, Microsoft will have to reorganize Game Pass and all of its video game -related services in some way.”
Although Microsoft would have to make compromises to win regulatory approval for the acquisition, it could be worthwhile for the company to fold in Activision’s intellectual property, which continues to generate revenue of more than $ 2 billion per quarter. in 2021.
“Activision has nearly 400 million monthly active users across 190 countries playing its games on consoles, PCs and mobile devices,” said Chirag Upadhyay, an analyst at market research firm Strategy Analytics. “This deal will allow Microsoft to reach a wider audience across multiple platforms while expanding its gaming footprint around the world.”
On the gaming hardware side, Microsoft continues to grapple with supply chain shortfalls that hinder the production and sale of its Xbox video game consoles.
“We are working as quickly as possible with our manufacturing and retail partners to accelerate production and shipping to keep pace with unprecedented demand,” a Microsoft spokesperson told S&P Global Market Intelligence.
Rising office prices
Microsoft is also looking forward to seeing some further revenue growth from its enterprise Office software following the price increase the company implemented for most of its commercial customers in March.
“Price increases will certainly make a difference in revenue growth but it doesn’t seem too difficult for the end user to prompt any significant abandonment of Microsoft Office, which, let’s face it, still has no real competitor to key productivity tools, ”Freeman said.
The office may have benefited from a pull forward since the price increases took effect on March 1 because some customers may have renewed before the increase, Jefferies analyst Brent Thill said. Upside for Office revenue may be more limited for the rest of this year on the calendar the result, Thill added.
The office also faces potential headwinds from slowing growth in the PC market. According to a report from IDC, global PC shipments dropped 5.1% year-on-year in the March quarter.
The “Office 365 juggernaut is likely to start a subtle speed slowdown,” due to the high penetration rate among commercial PC users as well as the slowdown in work-from-home demand fueled by the pandemic, says by UBS analyst Karl Keirstead.