Home Finance Is Microsoft Stock A Buy Or Sell Before Upcoming Earnings? – Seeking Alpha

Is Microsoft Stock A Buy Or Sell Before Upcoming Earnings? – Seeking Alpha

Is Microsoft Stock A Buy Or Sell Before Upcoming Earnings? – Seeking Alpha

Jean-Luc Ichard/iStock Editorial via Getty Images
Microsoft (MSFT) is expected to release Q2 fiscal 2022 earnings on 01/25/2022 after the bell. Consensus earnings-per-share (EPS) is $2.32, slightly ahead of normalized Q1 FY22 actual earnings of $2.27. Q1 FY22 earnings beat estimates by $0.19 per share. Revenue is expected to come in at just over $50 billion in Q2 FY22, ahead of the $45.3 billion posted in Q1 FY22. According to Seeking Alpha’s handy earnings surprise tracker, Microsoft has beat revenue and EPS estimates for eight straight quarters.
There are several metrics that investors will be looking at in the upcoming earnings release.
In examining Q1 FY22 results and full-year fiscal 2021 results, nearly all segments have shown significant growth, except for devices. Server products and cloud services, which encompasses Microsoft Azure and several other items, are the clear growth driver, and investors will want to see continued advancement here.
Data source: Microsoft. Chart by author.
As shown above, server products and other cloud services were up 35% YOY in Q1 FY22. This comes on the back of a 27% annual increase reported for fiscal 2021, as shown below.
Data source: Microsoft. Chart by author
Other standouts for growth include LinkedIn and search advertising. The Q1 FY22 YOY growth in office products, at 16%, was also quite encouraging. It will be interesting to see if Q2 can show similar results.
Microsoft’s margins have been rising lately, which is terrific news for shareholders. The EBITDA margin above 50% is especially impressive.
Much of this can also be attributed to the increased operating income from the intelligent cloud. As shown below, operating income is rising much faster than revenue in this segment.
Data source: Microsoft. Chart by author.
The operating margin for this segment has grown from 36% in FY 2019 to 38% in FY 2020 and finally to 43% in FY 2021. In Q1 fiscal 2022, the intelligent cloud operating margin came in up again, to 45%. Management is clearly operating at a very high level. This also shows a robust demand for Microsoft’s cloud products.
Microsoft continues to show a solid balance sheet position, despite the significant return of capital to shareholders through buybacks and dividends. The company reported over $130 billion on hand in cash and short-term investments compared with $50 billion in long-term debt in the last report. The cash and short-term investment balance account for over 5% of the current market cap. All told, the net debt puts the enterprise value at $2.24 trillion, or about $50 billion less than the market cap. Shareholders can expect a similar capital structure when Q2 FY22 earnings are released.
Microsoft’s current valuation metrics are higher than recent historical averages. Shown below is the forward EV to EBITDA and forward price-to-earnings (P/E) ratio side-by-side with other mega-caps Apple (AAPL) and Alphabet (GOOG). This suggests that investors expect earnings to continue to beat expectations and margins to stay elevated.
One great reason to invest in Microsoft is its commitment to return capital to shareholders through dividends and share buybacks. In fiscal 2021, the company repurchased $23 billion worth of shares. The pace of repurchases is accelerating, with another $6.2 billion repurchased in the first quarter of fiscal 2022. Share buybacks support investors in the market and increase EPS by reducing the number of outstanding shares. Microsoft has done an excellent job of this in recent years, as shown below. We can see the diluted share count dropping in the chart below while EPS has increased over several years.
To visualize this another way, the chart below shows the gains made in operating income and EBITDA in recent years as the number of shares outstanding has steadily decreased.
Data Source: Seeking Alpha. Chart by author
Here we can see how the effects of increased margins and the reduction in the share count have allowed the EPS to grow at a more robust pace than top-line sales.
Microsoft is planning another $60 billion in buybacks over subsequent periods and has recently raised the dividend to $0.62 quarterly for a yield of 0.80%.
Microsoft’s planned acquisition of Nuance Communications (NUAN) is now under investigation by authorities in the U.K. The acquisition is expected to assist Microsoft in providing industry-specific cloud solutions.

“Nuance provides the AI layer at the healthcare point of delivery and is a pioneer in the real-world application of enterprise AI. AI is technology’s most important priority, and healthcare is its most urgent application. Together, with our partner ecosystem, we will put advanced AI solutions into the hands of professionals everywhere to drive better decision-making and create more meaningful connections, as we accelerate the growth of Microsoft Cloud for Healthcare and Nuance.”
Satya Nadella, CEO, Microsoft
The transaction was expected to close sometime in 2022. According to Microsoft, the all-stock deal will be less than 1% dilutive and should be accretive to earnings in 2023.
Analysts are quite bullish overall on Microsoft stock. According to Seeking Alpha’s Wall St. Analyst Ratings, the consensus price target is $375.02. This represents a 21% potential increase from the current price. As I have previously written about, the metaverse is another area to watch. Investment firm Bernstein also predicts that Microsoft will be a metaverse winner because of the company’s ability to deliver on functionality. Cloud spending worldwide is expected to continue to accelerate this year, and Microsoft Azure will likely be one of the big winners from this trend. The total addressable market for cloud services continues to expand, and this trend has a long runway. Microsoft’s recent dip from its all-time highs may represent a solid entry point or opportunity to accumulate more shares. Given the current valuation and the market conditions, incremental purchasing may be the best option for long-term investors.
Note: Recent news of Microsoft’s potential acquisition of Activision (ATVI) came while this article was in editorial review. This move would make Microsoft the third largest gaming company per revenue. Microsoft’s tremendous resources could make this a big win for both sides. Stay tuned for further commentary.
This article was written by
Disclosure: I/we have a beneficial long position in the shares of MSFT either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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