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The Zacks Consensus Estimate for revenues is pegged at $64.13 billion, indicating growth of 14.2% from the figure reported in the year-ago quarter.
The consensus mark for earnings has remained steady at $2.90 per share over the past 30 days, suggesting 7.8% year-over-year growth.
Image Source: Zacks Investment Research
In the last reported quarter, the company delivered an earnings surprise of 5.91%. The company’s earnings beat the Zacks Consensus Estimate in the trailing four quarters, the average surprise being 7.38%.
Our proven model does not conclusively predict an earnings beat for Microsoft this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. This is not the case here. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.
Microsoft's performance in the fourth quarter of 2024 is expected to have shown robust growth, primarily driven by its Intelligent Cloud and Productivity and Business Processes segments. The company's strategic focus on cloud services, particularly Azure and the Office 365 suite, is likely to have contributed significantly to top-line growth.
In the Intelligent Cloud segment, the company anticipates revenues between $28.4 billion and $28.7 billion. Our model estimate for this segment is pegged at $28.54 billion, indicating growth of 19% from the figure reported in the year-ago quarter. In Azure, Microsoft expects revenue growth in the range of 30-31% at cc. Microsoft's Azure platform is spearheading the company's AI-driven growth strategy.
A key factor in Microsoft's growth strategy has been Teams, its enterprise communication platform. Teams has been expanding its customer base and feature set, effectively competing against rivals like Zoom. The platform's growth is closely tied to the rising popularity of hybrid and flexible work models.
In the quarter under review, Microsoft announced that it is set to sell Teams separately from its Office product globally. The decision comes after the company unbundled the two products in Europe to avert a possible EU antitrust fine.
Microsoft anticipates its Productivity and Business Processes segment to generate revenues between $19.9 billion and $20.2 billion. Our model estimate is pegged at $20.03 billion, indicating an increase of 9.5% year over year.
This growth is underpinned by strong performance across various product lines. Office 365 Commercial is expected to see revenue growth of approximately 14% at constant currency (cc), which is in line with our model estimate. However, traditional Office Commercial products are projected to experience a decline in the mid-to-high teens range, highlighting the ongoing shift from on-premise to cloud-based solutions.
The company's diversified portfolio continues to show promise, with Office Consumer products and cloud services expected to achieve revenue growth in the low-to-mid single digits. LinkedIn is projected to achieve mid-to-high single-digit growth. Our model estimate for LinkedIn is pegged at revenue growth of 6.6%.
Dynamics 365, Microsoft's enterprise resource planning and customer relationship management platform, is another steady performer, with the company projecting revenue growth in the low-to-mid teens.
For the More Personal Computing segment, the company projects revenues between $15.2 billion and $15.6 billion. Revenues from Windows are likely to have been driven by steady traction seen in Windows Commercial products and cloud services growth amid improving personal computer (PC) demand.
The Traditional PC market delivered its second quarter of growth following eight consecutive quarters of decline. According to preliminary results from the International Data Corporation (IDC) Worldwide Quarterly Personal Computing Device Tracker, worldwide shipments reached 64.9 million units in the second quarter of 2024, representing year-over-year growth of 3%.
Among other major PC vendors, Lenovo (LNVGY - Free Report) and Hewlett Packard (HPE - Free Report) registered an increase in shipments. Lenovo's shipments increased 3.7% year over year to 14.7 million units, while HPE's shipments grew 1.8% year over year to 13.7 million units. Additionally, Apple (AAPL - Free Report) registered a 20.8% year-over-year improvement in shipments, reaching 5.7 million units.
Microsoft expects Windows OEM revenues to grow in the mid to low-to-mid single-digit range. In the Gaming segment, MSFT expects revenue growth in the low to mid-40s, including roughly 50 points of net impact from the Activision acquisition. Furthermore, Microsoft anticipates Xbox content and services revenue growth in the high 50s, driven by roughly 60 points of net impact from the Activision acquisition. In the quarter under review, Microsoft announced the renewal of a publishing agreement with NetEase, which will bring back Blizzard Entertainment's games like World of Warcraft to players in China.
Price Performance & Valuation
Shares of MSFT have returned 17.8% year to date compared with the broader Zacks Computer & Technology sector’s growth of 21.5%. Shares of HPE and AAPL have gained 21.3% and 16.3%, respectively, while shares of LNVGY have declined 2.8%.
Year-to-Date Performance
Image Source: Zacks Investment Research
Now, let’s look at the value Microsoft offers investors at current levels. MSFT is trading at a premium with a forward 12-month P/S of 11.73X compared with the Zacks Computer - Software industry’s 8.13X and higher than the median of 10.05X, reflecting a stretched valuation.
MSFT’s P/S F12M Ratio Depicts Stretched Valuation
Image Source: Zacks Investment Research
Investment Thesis
Microsoft presents a strong investment case with its dominant position in cloud computing (Azure) and productivity software (Office 365), driving consistent revenue growth. The company's strategic focus on AI integration and partnerships, like with OpenAI, positions it at the forefront of technological innovation. Microsoft's diversified portfolio, including gaming (Xbox) and professional networking (LinkedIn), provides stability and multiple growth avenues.
However, potential challenges include intense competition in the cloud market, particularly from Amazon and Google, and the cyclical nature of enterprise IT spending. Regulatory scrutiny over market dominance and data privacy concerns pose additional risks. Despite these challenges, Microsoft's strong balance sheet, consistent cash flow, and history of shareholder returns through dividends and buybacks make it an attractive option for investors seeking a balance of growth and stability in the tech sector.
Final Thoughts
Microsoft's strong performance in productivity and collaboration offerings is expected to drive substantial growth in the fiscal fourth quarter of 2024 despite a premium valuation and fierce competition in the cloud market. The company's strategic focus on cloud services, AI integration, and innovative product development has positioned it favorably in the competitive market. Maintaining a position in Microsoft appears prudent at present. Investors looking to buy the stock should, however, wait for a better entry point.
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Should You Buy, Sell or Hold Microsoft (MSFT) Before Q4 Earnings?
Microsoft (MSFT - Free Report) is set to report fourth-quarter fiscal 2024 results on Jul 30.
The Zacks Consensus Estimate for revenues is pegged at $64.13 billion, indicating growth of 14.2% from the figure reported in the year-ago quarter.
The consensus mark for earnings has remained steady at $2.90 per share over the past 30 days, suggesting 7.8% year-over-year growth.
Image Source: Zacks Investment Research
In the last reported quarter, the company delivered an earnings surprise of 5.91%. The company’s earnings beat the Zacks Consensus Estimate in the trailing four quarters, the average surprise being 7.38%.
Microsoft Corporation Price and EPS Surprise
Microsoft Corporation price-eps-surprise | Microsoft Corporation Quote
Earnings Whispers
Our proven model does not conclusively predict an earnings beat for Microsoft this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. This is not the case here. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.
MSFT has an Earnings ESP of 0.00% and a Zacks Rank #3 at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Factors Shaping Upcoming Results
Microsoft's performance in the fourth quarter of 2024 is expected to have shown robust growth, primarily driven by its Intelligent Cloud and Productivity and Business Processes segments. The company's strategic focus on cloud services, particularly Azure and the Office 365 suite, is likely to have contributed significantly to top-line growth.
In the Intelligent Cloud segment, the company anticipates revenues between $28.4 billion and $28.7 billion. Our model estimate for this segment is pegged at $28.54 billion, indicating growth of 19% from the figure reported in the year-ago quarter. In Azure, Microsoft expects revenue growth in the range of 30-31% at cc. Microsoft's Azure platform is spearheading the company's AI-driven growth strategy.
A key factor in Microsoft's growth strategy has been Teams, its enterprise communication platform. Teams has been expanding its customer base and feature set, effectively competing against rivals like Zoom. The platform's growth is closely tied to the rising popularity of hybrid and flexible work models.
In the quarter under review, Microsoft announced that it is set to sell Teams separately from its Office product globally. The decision comes after the company unbundled the two products in Europe to avert a possible EU antitrust fine.
Microsoft anticipates its Productivity and Business Processes segment to generate revenues between $19.9 billion and $20.2 billion. Our model estimate is pegged at $20.03 billion, indicating an increase of 9.5% year over year.
This growth is underpinned by strong performance across various product lines. Office 365 Commercial is expected to see revenue growth of approximately 14% at constant currency (cc), which is in line with our model estimate. However, traditional Office Commercial products are projected to experience a decline in the mid-to-high teens range, highlighting the ongoing shift from on-premise to cloud-based solutions.
The company's diversified portfolio continues to show promise, with Office Consumer products and cloud services expected to achieve revenue growth in the low-to-mid single digits. LinkedIn is projected to achieve mid-to-high single-digit growth. Our model estimate for LinkedIn is pegged at revenue growth of 6.6%.
Dynamics 365, Microsoft's enterprise resource planning and customer relationship management platform, is another steady performer, with the company projecting revenue growth in the low-to-mid teens.
For the More Personal Computing segment, the company projects revenues between $15.2 billion and $15.6 billion. Revenues from Windows are likely to have been driven by steady traction seen in Windows Commercial products and cloud services growth amid improving personal computer (PC) demand.
The Traditional PC market delivered its second quarter of growth following eight consecutive quarters of decline. According to preliminary results from the International Data Corporation (IDC) Worldwide Quarterly Personal Computing Device Tracker, worldwide shipments reached 64.9 million units in the second quarter of 2024, representing year-over-year growth of 3%.
Among other major PC vendors, Lenovo (LNVGY - Free Report) and Hewlett Packard (HPE - Free Report) registered an increase in shipments. Lenovo's shipments increased 3.7% year over year to 14.7 million units, while HPE's shipments grew 1.8% year over year to 13.7 million units. Additionally, Apple (AAPL - Free Report) registered a 20.8% year-over-year improvement in shipments, reaching 5.7 million units.
Microsoft expects Windows OEM revenues to grow in the mid to low-to-mid single-digit range. In the Gaming segment, MSFT expects revenue growth in the low to mid-40s, including roughly 50 points of net impact from the Activision acquisition. Furthermore, Microsoft anticipates Xbox content and services revenue growth in the high 50s, driven by roughly 60 points of net impact from the Activision acquisition. In the quarter under review, Microsoft announced the renewal of a publishing agreement with NetEase, which will bring back Blizzard Entertainment's games like World of Warcraft to players in China.
Price Performance & Valuation
Shares of MSFT have returned 17.8% year to date compared with the broader Zacks Computer & Technology sector’s growth of 21.5%. Shares of HPE and AAPL have gained 21.3% and 16.3%, respectively, while shares of LNVGY have declined 2.8%.
Year-to-Date Performance
Image Source: Zacks Investment Research
Now, let’s look at the value Microsoft offers investors at current levels. MSFT is trading at a premium with a forward 12-month P/S of 11.73X compared with the Zacks Computer - Software industry’s 8.13X and higher than the median of 10.05X, reflecting a stretched valuation.
MSFT’s P/S F12M Ratio Depicts Stretched Valuation
Image Source: Zacks Investment Research
Investment Thesis
Microsoft presents a strong investment case with its dominant position in cloud computing (Azure) and productivity software (Office 365), driving consistent revenue growth. The company's strategic focus on AI integration and partnerships, like with OpenAI, positions it at the forefront of technological innovation. Microsoft's diversified portfolio, including gaming (Xbox) and professional networking (LinkedIn), provides stability and multiple growth avenues.
However, potential challenges include intense competition in the cloud market, particularly from Amazon and Google, and the cyclical nature of enterprise IT spending. Regulatory scrutiny over market dominance and data privacy concerns pose additional risks. Despite these challenges, Microsoft's strong balance sheet, consistent cash flow, and history of shareholder returns through dividends and buybacks make it an attractive option for investors seeking a balance of growth and stability in the tech sector.
Final Thoughts
Microsoft's strong performance in productivity and collaboration offerings is expected to drive substantial growth in the fiscal fourth quarter of 2024 despite a premium valuation and fierce competition in the cloud market. The company's strategic focus on cloud services, AI integration, and innovative product development has positioned it favorably in the competitive market. Maintaining a position in Microsoft appears prudent at present. Investors looking to buy the stock should, however, wait for a better entry point.