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What to Look For From MSFT

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Key Takeaways

  • Analysts estimate adjusted EPS of $2.18 vs. $1.95 in Q3 FY 2021.
  • Xbox content and services revenue is expected to rise YOY, but at a slower pace than the prior-year quarter.
  • Total revenue is expected to post strong growth, but at a slower rate than previous quarters.

Microsoft Corp. (MSFT) has weathered the COVID-19 pandemic exceptionally well, generating strong earnings and revenue growth during the past two fiscal years. Sales of cloud services and software were two key drivers. But the seeds of Microsoft’s future growth may lie in a very different skill: its success in navigating a hostile regulatory environment. While other big tech companies have become targets of aggressive antitrust investigations, Microsoft has largely avoided these conflicts. This may be critical to Microsoft’s proposed $69-billion acquisition of video game developer Activision Blizzard Inc. (ATVI). The deal, Microsoft’s largest-ever acquisition attempt, still must be approved by regulators.

Investors will watch closely whether Microsoft can continue its strong financial performance – including the latest news on Activision Blizzard’s scrutiny by regulators – when the company reports earnings on April 26, 2022 for Q3 FY 2022. Microsoft’s fiscal year (FY) ends on June 30. Analysts predict that adjusted earnings per share (EPS) will climb, but at the slowest pace in seven quarters. Revenue growth is expected to be solid but slightly behind the last four quarters.

Investors will also focus on constant currency YOY growth of Microsoft’s Xbox content and services revenue, a key metric gauging the amount of sales the company generates from its video game hardware, software, and related services. If the pending acquisition of Activision Blizzard is approved by regulators, Microsoft would become one of the largest video game companies in the world. But without the acquisition, Xbox content and services revenue in Q1 is expected to grow at a much slower rate than the prior-year quarter.

Microsoft stock has outperformed the broader market in the last year. The company’s shares began to outperform in June 2021, with the widest outperformance gaps occurring in November and December of that year. Since then, the stock as drifted largely downward and sideways, sharply narrowing its outperformance gap compared to the market. As of April 24, Microsoft shares have provided 1-year trailing total returns of 7.4%, ahead of the 3.3% total return of the S&P 500.

Source: TradingView.

Microsoft Earnings History

Microsoft has posted at least 16 consecutive quarters of YOY earnings growth since Q3 FY 2018. Save for three of these 16 quarters, that YOY growth has ranged between roughly 20% and 35% a quarter. Some of the most robust earnings growth has been in the last year, with quarterly EPS growth reaching as high as 48.3% in Q4 FY 2021. Growth has decelerated in the first two quarters of FY 2022, and analysts predict that Q3 FY 2022 growth will be substantially slower, at just 11.8%. While this is still solid performance, it nonetheless is at the lower end of Microsoft’s quarterly EPS growth range in recent years.

Revenue growth has been similarly steady. Between Q3 FY 2018 and Q2 FY 2022 quarterly revenue growth ranged from 12.1% to 22.0%. As with earnings, the past several quarters have seen some of the strongest revenue growth in recent years, with the most recent three consecutive quarters each above 20% growth YOY. Analysts estimate that growth will slow to 17.5% for Q3 FY 2022. While this is somewhat lower than recent quarters, it is nonetheless toward the upper end of the range of revenue growth in the past three years.

Microsoft Key Stats
 Estimate for Q3 FY 2022Q3 FY 2021Q3 FY 2020
Adjusted EPS ($)2.181.951.40
Revenue ($B)49.041.735.0
Constant currency growth, Xbox Content and Services5.2%32.0%2.0%

Source: Visible Alpha

The Key Metric

As mentioned above, investors will also focus on the constant currency YOY growth in Microsoft’s Xbox content and services revenue. This key metric measures the performance of Microsoft’s Xbox content and services, comprising digital transactions, Xbox Game Pass and other subscriptions, video games, third-party video game royalties, cloud services, and advertising. Microsoft’s pending acquisition of Activision Blizzard, if approved by regulators, would dramatically expand the company’s reach in games. Once the acquisition is complete, investors will watch to see how many of Activision’s games will be included in Microsoft’s “Game Pass” service, which allows customers to pay a flat subscription fee to play a library of games. Microsoft hasn’t announced to what extent many future Activision Blizzard games will be exclusive to Xbox consoles or Game Pass, which could be a big blow to rival game companies. To be sure, if future Activision games are exclusive to Microsoft’s Xbox consoles or Game Pass service, it would also be a significant boon for to those brands. However, Microsoft has revealed its plans on one key issue: Activision’s blockbuster “Call of Duty” franchise will not be exclusive to Xbox.

The growth of Microsoft’s Xbox content and services revenue has been highly variable in recent years. The business grew revenue at more than 30% per quarter during the first three quarters of FY 2021, a robust pace. But it faltered in the fourth quarter, falling by 7.0%. It posted zero growth in Q1 FY 2022, improving to 10.0% growth in Q2 FY 2022. For Q3, analysts expect growth of 5.2%.

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