Microsoft (MSFT, Financial) will be reporting its third-quarter earnings after the market close on April 27. During the second quarter, Microsoft reported near-flat growth of 1.24% as revenue touched $24.09 billion, up from $23.796 billion during the year-ago period. After watching its revenue decline in 2016, Microsoft has slowly moved its numbers up reporting growth of 0.36% during the first quarter and 1.24% during the second quarter. All eyes will be on how much bigger this number gets during the third quarter.
One of the major drivers behind Microsoft’s growth momentum was revenues from cloud services, which have been on a steady rise over the past two years even as the Windows revenue decline was arrested. In the first six months of the current fiscal, Microsoft’s Productivity and Business Processes segment reported growth of 8.03%, and Intelligent Cloud recorded 8.24% while More Personal Computing continued its downward trend, registering a decline of 3.73%.
The good news for Microsoft is that its cloud-based revenue streams in the Productivity and Intelligent Cloud segments now have a combined revenue that is much more than their Windows-dominated More Personal Computing segment.
During the second quarter, these two segments accounted for nearly 60% of Microsoft’s revenue, and they have already reached a position from where they can mask a lot of weakness in the More Personal Computing segment.
With forecasts for cloud looking as good as ever and Microsoft’s Office 365 surging in a big way, booking client after client, Microsoft’s annualized cloud revenue run rate, which crossed $14 billion in second-quarter 2017, should continue its double-digit growth during the third quarter as well while Microsoft Azure continues its near triple-digit growth rate.
The bad news is, once again, Windows. After declining for the past five consecutive years, there was some expectation that PC sales would slowly recover this year and find some stability. According to Gartner, that remains a pipe dream because PC sales declined 2.4% during the first quarter. The sharp decline looks even worse when you compare first-quarter numbers for this year with what happened in 2011.
“Worldwide PC shipments totaled 62.2 million during the first quarter of 2017, a far cry from the 84.3 million units that shipped in 2011 – a drop of more than ¼ of sales in six years.”–”‹”‹1reddrop
Microsoft’s Windows OEM revenues showed signs of stabilizing during the second quarter and, if they can hold their ground with some support from Commercial PC sales, it would do a world of good for Microsoft's third-quarter revenue growth numbers.
There is one more problem – an opportunity in disguise – waiting for investors during the third quarter. If Microsoft somehow manages to report underwhelming growth numbers, the stock price will take a hit because of the way it has surged over the past 12 months.
The stock is trading near 52-week highs with a price-sales (P/S) multiple of nearly 6. The valuation has gone up significantly; and at these levels, negative news can put a lot of downward pressure on the stock in the short term. If you are long-term investor, that’s precisely the time you should be waiting for. Load Microsoft if it moves lower after third-quarter results.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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