Reports Q2 2022 results on Tuesday, January 25, after market close
Income forecast: $50.65 billion
EPS forecast: $2.31
Investors will likely see a familiar growth pattern when Microsoft (NASDAQ:) releases its final earnings report after the Wall Street shutdown later today.
The Redmond, Washington-based company's quarterly results have surpassed analysts' earnings estimates for the past 11 consecutive quarters, demonstrating the success of Chief Executive Officer Satya Nadella's strategy to focus on cloud computing, that provides data storage and runs requests for businesses.
In Microsoft's most recent in October, sales of Azure and other cloud services grew 50%, just below the rate of 51% in the previous quarter. Microsoft makes about 70% gross margin on cloud sales to businesses, a number many Wall Street executives can only dream of.
MSFT Weekly Chart
Microsoft shares were up more than 50% last year, the 10th straight year of positive stock returns, as well as the ninth straight year of double-digit gains.
Yet Microsoft and other high-growth stocks are under pressure in the near term as rising interest rates reduce their attractiveness for investment. In 2022, MSFT stocks are down about 12%, in line with the general sell-off of technology stocks.
Office 365 revenue for enterprise customers grew 23% in the company's first quarter of fiscal year 2022, aided by the software's advanced features. Obviously, in addition to the cloud segment where Microsoft competes with Amazon (NASDAQ:) and Alphabet (NASDAQ:), sales of the company's legacy business are also growing.
Profitability of these services is expected to increase further as the company continues to push through price increases. The cost of one type of subscription, the premium Office 365 E5, will increase by 9% per user per month from March 1, while the price of the more affordable Office 365 E1 will increase by 25%
Commercial subscriptions to Office 365 represented approximately 18% of Microsoft revenue in the fiscal year ended June 30. Analysts estimate the move will add $5 billion to the company's revenue by 2022.
Acquisition Spree
Loaded with cash and earnings momentum, Microsoft is paving the way for future growth by aggressively buying companies that can enhance its already strong competitive advantage and offer. In one such move this month, the company agreed to buy Activision Blizzard (NASDAQ:) in an approximately $75 billion cash deal, its largest acquisition to date, to further expand its video game business.
This deal, expected to close next year, will expand Microsoft's appeal to the Xbox console and push it into the fast-growing mobile gaming markets and the metaverse, making Microsoft the world's number 3 gaming company.
According to FactSet, analysts estimate Activision's total revenue in 2021 totaled $8.7 billion, while Microsoft reported $15.4 billion in gaming revenue for the fiscal year through June, accounting for approximately 9% of the total turnover.
Last year, Microsoft made its second-largest acquisition, spending $16 billion for artificial intelligence company Nuance Communications (NASDAQ:), to capture growth in the healthcare market.
These growth initiatives, combined with the company's leadership position in the cloud segment, make Microsoft an ideal candidate for long-term investors. Indeed, the majority of the analysts surveyed gave MSFT a buy recommendation.
Chart: Investing.com
Of the 45 analysts surveyed by Investing.com who report on Microsoft, 42 have an outperform rating for the stock, with the 12-month average price target or $368.52 holding 24% upside potential.
Line
Microsoft's earnings release later today will likely show the company remains in a strong growth phase, aided by its cloud computing activities. The stock's current weak period offers a good buying opportunity for long-term investors.
