Microsoft cloud, gaming in focus as we continue to work and play from home
Microsoft (MSFT) is scheduled to report results of the second quarter of its fiscal year 2021 after the market close on January 26, with a conference call scheduled for 5:30 pm ET. What to watch for:
1. CLOUD: In its first quarter, Microsoft reported $13.0B in "Intelligent Cloud" segment revenue, up 20% year-over-year, or 19% in constant currency. Server products and cloud services revenue increased 22%, or 21% in constant currency, driven by Azure revenue growth of 48%, or 47% in constant currency.
At the time of its report, CEO Satya Nadella said Microsoft is "innovating across our full modern tech stack to help our customers in every industry improve time to value, increase agility, and reduce costs," adding that "the next decade of economic performance for every business will be defined by the speed of their digital transformation."
In a recently published earnings preview, Morgan Stanley analyst Keith Weiss reiterated Microsoft as a Top Pick in Software and called it a "top stock for the recovery" ahead of the company's upcoming Q2 results, which he thinks are likely to highlight the durability of Microsoft's commercial businesses as well as "conservatism in forward consensus expectations." Weiss, who sees upside to consensus looking for 41% and 36% year-over-year Azure growth in FY21 and FY22, respectively, keeps an Overweight rating and $260 price target on Microsoft shares.
Last week, Goldman Sachs analyst Kash Rangan initiated coverage of Microsoft with a Buy rating and $285 price target. The company stands out "uniquely" with its presence across all layers of the cloud stack, the analyst told investors. Rangan added that Microsoft is well positioned to double its $60B commercial cloud business which includes Azure, Office 365, Dynamics, and LinkedIn Commercial into a $120B-$140B business longer term. The analyst further stated that Office 365 could potentially double its installed base from over 255M to 500M given the massive number of knowledge workers worldwide.
On the same day, Citi analyst Walter Pritchard said he sees a positive setup around Microsoft's key top-line metrics into the quarterly results, with likely upside to Azure growth metrics and forward Azure numbers after "continued strong contract signing and consumption indications." He keeps a Buy rating on Microsoft with a $272 price target.
2. VIDEO GAMES: On January 15, NPD analyst Mat Piscatella said that consumer spending across video game hardware, content and accessories reached a December record $7.7B, 25% higher when compared to a year ago. Hardware dollar sales reached $1.35B in December 2020, an increase of 38% when compared to a year ago, and the highest total for a Decemeber month since the $1.37B achieved in December 2013. The Nintendo Switch (NTDOY) was the best-selling hardware platform in units and dollars for both December and the 2020 year, said Piscatella, who noted that Sony's (SNE) PlayStation 5 finished 2020 as the #2 best-selling console in dollar sales, while PlayStation 4 ranked second in units sold.
On January 22, Microsoft said it will be making price adjustments for Xbox Live Gold, its online play subscription service, in select markets. "The price of a 1-month Gold membership is increasing $1 USD and the price of a 3-month membership is increasing $5 USD or the equivalent amount in your local market," the company said. "Going forward, new pricing will be 1-month for $10.99, 3-months for $29.99, and 6-months for $59.99, or your local market equivalent," Microsoft noted.
In his own Q2 preview note issued on January 24, Jefferies analyst Brent Thill said video games, which represented 8% of Microsoft revenue in FY20, are "uniquely positioned to outperform given the console launch and stay-at-home activity," though he acknowledged that supply chain constraints "may slow some of this." Thill has a Buy rating and $260 price target on Microsoft shares.
3. GM DEAL: On January 19, Cruise and General Motors (GM) announced they have entered a long-term strategic relationship with Microsoft to "accelerate the commercialization of self-driving vehicles." The companies said Cruise will "leverage Azure, Microsoft's cloud and edge computing platform, to commercialize its unique autonomous vehicle solutions at scale." Meanwhile, as Cruise's preferred cloud provider, Microsoft will "tap into Cruise's deep industry expertise to enhance its customer-driven product innovation and serve transportation companies across the globe through continued investment in Azure," the companies said. Microsoft will join General Motors, Honda (HMC) and institutional investors in a combined new equity investment of more than $2B in Cruise, bringing the post-money valuation of Cruise to $30B.