Microsoft cloud, gaming in focus as many around the globe work and play from home
Microsoft (MSFT) is scheduled to report results of the first quarter of its fiscal year 2021 after the market close on October 27, with a conference call scheduled for 5:30 pm ET. What to watch for:
1. CLOUD: In the fourth quarter, Microsoft reported $13.4B in "Intelligent Cloud" segment revenue, up 17% year-over-year, or 19% in constant currency. Server products and cloud services revenue increased 19%, up 21% in constant currency, driven by Azure revenue growth of 47%, or 50% in constant currency.
At the time of its last report, CEO Satya Nadella said Microsoft is "the only company with an integrated, modern technology stack - powered by cloud and AI and underpinned by security and compliance - to help every organization transform and reimagine how they meet customer needs."
In a recently published earnings preview, Wedbush analyst Daniel Ives noted that he has seen strong cloud deal activity around Azure in the field during the September quarter, with another Street "beat and raise" likely in the cards for Microsoft. This current work from home environment is further catalyzing more enterprises to make the strategic cloud shift with Microsoft across the board, with Azure growth likely in the 50% range, Ives contends. Ives has an Outperform rating and a $260 price target on the shares.
Last week, Stifel analyst Brad Reback raised the firm's price target on Microsoft to $245 from $220, telling investors that he expects upside to consensus EPS and revenue estimates driven by Microsoft's various properties - including Azure, Office365 and PC - continuing to benefit from accelerated digital transformation due to the pandemic and a rebounding worldwide economy. He also expects solid December guidance from Microsoft based on checks that point towards a steady improvement in the broader software group around customer engagement and buying patterns, said Reback, who has a a Buy rating on the shares.
Earlier this month, Jefferies analyst Brent Thill raised the firm's price target on Microsoft to $260 from $240 ahead of the company's fiscal Q1 report. The analyst, who said he expects the company to deliver "strong results coupled with a conservative guide," as they normally do, forecasts Azure to grow 42% year-over-year, which compares to consensus at 44%. He will also be looking for some directional guidance on FY21 operating margin and on whether the company is able to expand margins following expansion of nearly 300 basis points in FY20, Thill added.
On October 15, Mizuho analyst Gregg Moskowitz raised the firm's price target on Microsoft to $255 from $240 and keeps a Buy rating on the shares. While economic challenges associated with COVID-19 remain, channel checks indicate continued improvement with respect to the spending environment in software, Moskowitz tells investors in a research note. The analyst's Azure checks "were good," and thus he believes Microsoft will meet or beat his forecast for 45% year-over-year Azure growth in the quarter.
On the day after Microsoft's last earnings report, Oppenheimer analyst Timothy Horan downgraded the stock to Perform from Outperform after the company reported June quarter results he viewed as "mixed." Cloud growth slowed "materially," said Horan, who estimated that total cloud revenue growth slowed to 22% from 32%. While Microsoft remains the dominant hybrid cloud platform, slowing cloud growth could increase competition and spending, said Horan, who also noted at the time that strength in consumer is more cyclical and the stock was trading at all-time highs in terms of valuation.
2. XBOX UPCOMING: On October 16, Kotaku's Stephen Totilo reported that Xbox chief Phil Spencer said that he expects the upcoming Xbox Series X and Series S consoles to be hot sellers heading into the holiday season. "I think we'll sell every unit of both of them that we can deliver," Spender told Totilo, referring to the upcoming holiday season. "I think demand is just going to outstrip supply of pre-orders," he added. "For us and PlayStation, I think that the manufacturing supply chain is going to dictate share more than anything else."
Earlier in the month, GameStop (GME) announced that it has entered into a multi-year partnership agreement with Microsoft to "standardize the company's business operations on Microsoft's cloud solutions and hardware products to deliver rich new digital experiences to customers." Under the agreement, GameStop will standardize its back-end and in-store solutions on Dynamics 365.
Subsequently, Domo Capital Management said in a tweet that GameStop confirmed with the firm that the agreement with Microsoft includes revenue sharing on all downstream revenue, such as digital downloads and digital content, from any device that GameStop brings into the Xbox ecosystem.
In other gaming news during the quarter, Microsoft announced on September 21 plans to acquire ZeniMax Media, the parent company of Bethesda Softworks, a privately held game developer and publisher of gaming franchises including The Elder Scrolls and Fallout, among others. Under the terms of the agreement, Microsoft will acquire ZeniMax Media for $7.5B in cash and Microsoft expects the acquisition to close in the second half of fiscal year 2021.
After the deal was announced, one day ahead of the company's pre-sale launch of its new console, Jefferies' Thill said Microsoft "is doubling down on gaming" with its largest gaming deal ever. The analyst, who thinks Bethesda content will help drive Microsoft's Game Pass business and Project xCloud, believes Microsoft will respect any previous exclusivity contracts with Sony's (SNE) PlayStation but upon expiration would expect content to be brought to Xbox as well.
3. NO DEAL FOR TIKTOK: On September 13, Microsoft said in a blog post that ByteDance, the owner of social video app TikTok, had chosen not to sell the U.S. assets of TikTok to the company. "ByteDance let us know today they would not be selling TikTok's US operations to Microsoft. We are confident our proposal would have been good for TikTok's users, while protecting national security interests. To do this, we would have made significant changes to ensure the service met the highest standards for security, privacy, online safety, and combatting disinformation, and we made these principles clear in our August statement. We look forward to seeing how the service evolves in these important areas," the post read.
The next day, Oracle (ORCL) confirmed in a press release Treasury Secretary Steven Mnuchin's statement that it is part of the proposal submitted by ByteDance to the Treasury Department over the weekend in which Oracle "will serve as the trusted technology provider." The company added, "Oracle has a 40-year track record providing secure, highly performant technology solutions."
Dan Primack, the business editor at Axios, said in a series of tweets at that time: "Oracle didn't beat Microsoft to buy TikTok. Because 'trusted tech partner' isn't the same as buying anything. No one is buying TikTok. [...] Given what it seems Oracle is possibly getting, we all were wrong in referring to Trump's extortion demand as an 'investment banking fee.' It's really more of a sales commission. (still don't imagine it's part of the deal)"
About a week later, Oracle and Walmart (WMT) announced tentative U.S. government approval for an agreement with the U.S. to resolve the outstanding issues, which will now include Oracle and Walmart together investing to acquire 20% of the newly formed TikTok Global business. Walmart stated: "We are excited about our potential investment in and commercial agreements with TikTok Global. While there is still work to do on final agreements, we have tentatively agreed to purchase 7.5% of TikTok Global as well as enter into commercial agreements to provide our ecommerce, fulfillment, payments and other omnichannel services to TikTok Global. Our CEO, Doug McMillon, would also serve as one of five board members of the newly created company. In addition, we would work toward an initial public offering of the company in the United States within the next year to bring even more ownership to American citizens. The final transaction will need to be approved by the relevant U.S. government agencies."