Microsoft reports as analysts raise expectations, fueled by cloud
Microsoft (MSFT) is scheduled to report results of the second quarter of its fiscal year 2020 after the market close on January 29, with a conference call scheduled for 5:30 pm ET. What to watch for:
1. CLOUD: In the first quarter, Microsoft reported $10.8B in "Intelligent Cloud" segment revenue, up 27% year-over-year, or 29% in constant currency. Server products and cloud services revenue increased 30%, or 33% in constant currency, driven by Azure revenue growth of 59%, or 63% in constant currency. In the second quarter of last year, Microsoft said its revenue in Intelligent Cloud was $9.4B and increased 20% year-over-year.
In a recently published earnings preview, Goldman Sachs analyst Heather Bellini said her talks with Microsoft partners continue to point to strong momentum across the business, with Azure "continuing to materially outpace overall market growth and Office 365 remaining front and center of digital transformation initiatives." Bellini, who predicted "another solid quarter with revenue and EPS upside" from Microsoft, reiterated her Buy rating and $161 price target on the stock.
Ahead of Microsoft's quarterly results, Wedbush analyst Daniel Ives also said cloud strength on Azure and Office 365 "continues to be the fuel in the tank," adding that his "strong field checks" indicate that the company could beat commercial cloud expectations by 3%-4%. Ives has an Outperform rating and $195 price target on the shares.
Earlier this month, Morgan Stanley analysts Keith Weiss, James Faucette, Katy Huberty and Meta Marshall reported results from the firm's quarterly survey of 100 U.S. and European Chief Information Officers, or CIOs. Weiss noted that the survey supported his thesis that Microsoft remains well-exposed to secular themes topping the CIO priority list. Microsoft regained its top spot as the largest IT share gainer over the next three years over Amazon (AMZN) and CIOs' preference for Microsoft as the preferred hybrid cloud vendor "has become increasingly apparent," said Weiss, who keeps an Overweight rating and $189 price target on the shares.
2. M&A OPPORTUNITIES: On January 23, Piper Sandler analyst Brent Bracelin raised his price target for Microsoft to $190 from $158, saying that 2020 could be the "defining year" for the next decade at the company. The analyst believes Microsoft has a "unique opportunity" to further elevate its cloud leadership position through share gains and "needle-moving" acquisitions.
With $67B in net cash and investments and another $200B of future operating cash flows over the next three years, Bracelin argued that acquisitions "could take center stage in 2020." Further, he noted that Microsoft has "many options to enhance its position as a trusted enabler of the digital enterprise" beyond Azure, Office 365, LinkedIn, and GitHub. He cited the company's cloud, gaming, and security potential for the target raise and recommended continuing to own the shares as a core cloud holding.
After applying Microsoft's acquisition philosophy and framework across the business application software universe, Piper Sandler's Bracelin has identified potential acquisition targets that he would deem to be "needle-moving pursuits." The 10 strategic M&A opportunities he sees include Autodesk (ADSK), Twilio (TWLO), Workday (WDAY), Salesforce (CRM), UiPath, RingCentral (RNG), Zendesk (ZEN), Flexport, Unity, and Coupa (COUP).
3. JEDI CONTRACT: Also on January 23, Reuters' Jeffrey Dastin reported that Amazon has filed a motion in court to pause the U.S. Department of Defense and Microsoft from carrying out the up to $10B JEDI contract until a court rules on its protest of the contract award. Wedbush analyst Daniel Ives noted that this action came on the heels of the formal protest that AWS has launched within the DOD/federal courts around the heated JEDI procurement process with hopes to change the outcome. AWS claims it did not win the JEDI contract as a result of President Trump's repeated public and private attacks against Amazon and, specifically, around Jeff Bezos. While this will cause noise and delay to the official start of the JEDI deal, Ives firmly does not believe this will change the decision. While Amazon will continue to fight this issue in "JEDIgate" and possibly drag out the inevitable start of JEDI, the analyst ultimately believes this is a paradigm changer for Microsoft who will remain the lone winner. He maintains an Outperform rating and $195 price target on Microsoft shares.
4. CLIMATE CHANGE: On January 16, Microsoft announced a plan to reduce and ultimately remove its carbon footprint. By 2030 Microsoft will be carbon negative, and by 2050 Microsoft will remove from the environment all the carbon the company has emitted either directly or by electrical consumption since it was founded in 1975, it pledged. In addition to its plan to become carbon negative by 2030, Microsoft President Brad Smith said in a blog post that Microsoft is also launching "an initiative to use Microsoft technology to help our suppliers and customers around the world reduce their own carbon footprints and a new $1B climate innovation fund to accelerate the global development of carbon reduction, capture, and removal technologies."