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2 Top-Notch Tech Bigwigs to Buy Ahead of Earnings

Tirthankar Chakraborty

The alarm bells are ringing for big tech giants this earnings season. Morgan Stanley’s equity strategist Michael Wilson added that the broader technology sector had seen the biggest percentage of companies missing earnings estimates in the fourth quarter of 2018 and the same is expected this earnings season. First-quarter earnings for the S&P 500 technology companies are expected to decline 10% year over year.

However, all is not lost as two tech behemoths are well poised to come through with flying colors this earnings season on growing cloud infrastructure. We’re, undoubtedly, talking about Microsoft Corporation MSFT and Amazon.com Inc AMZN.

Both the companies were known for one thing, software in case of Microsoft and online books for Amazon. But now they have expanded their reach into other business areas, with commercial cloud computing being their primary source of revenue.

Cloud computing, by the way, helps businesses access databases and application services over the Internet. And companies like Microsoft and Amazon maintain the network-connected hardware required for these services.

While Microsoft is scheduled to report third-quarter fiscal 2019 results on Apr 24, Amazon is expected to report first-quarter earnings on Apr 25, both after market close. Let us, thus, look at what investors can expect from their earnings report.

Microsoft’s Commercial Cloud Revenues to Keep Growing

Microsoft’s drive to become a more cloud-centric company has helped the software giant more than double its share price in the past three years and surpass the broader S&P 500 (+140.7% vs 39.7%).

 

In fact, Microsoft registered solid revenue growth in the fiscal second quarter, with the best performance coming from its cloud division that comprises products including Office 365 commercial, Azure and Dynamics 365. Its cloud business rose 48% year over year to $9 billion, mostly propelled by Azure’s year-over-year revenue growth of 76%, added CEO Satya Nadella.

Majority of analysts believe that the cloud division will maintain rapid growth in the fiscal third quarter and have a positive impact on the company’s earnings narrative, especially, after CFO Amy Hood noted that she expects “continued strong performance in commercial cloud business.”

Moreover, the company is expected to create a host of e-commerce tools for its Azure cloud customers, thereby making it more appealing. Needless to say, an array of brick-and-mortar retailers such as Walgreens Boots Alliance, Inc. WBA, The Kroger Co. KR and Walmart Inc. WMT, have chosen Azure over Amazon Web Services (AWS).

Thus, addition of cloud computing is expected to help Microsoft continue its impressive record with respect to upbeat earnings results. Analysts widely expect Microsoft to report $1 earnings per share in the fiscal third quarter, higher than 95 cents recorded a year ago.

 

Analysts’ consensus estimates call for revenues of almost $29.84 billion, up about 11% from the same period last year.

 

The Zacks Rank #2 (Buy) company also has an Earnings ESP of +0.14%. This is Zacks’ proprietary methodology for determining stocks that have the best chance to surprise with their next earnings announcement. It provides the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Encouraging earnings performance, without a doubt, leads to a rally in share price. The company’s expected earnings growth rate for the current year is 13.9%, more than the Computer - Software industry’s estimated rise of 7.8%. In fact, the company has been outperforming the broader industry in the past three years (+140.7% vs +106.3%).

 

Amazon — The Undisputed Leader in Cloud Computing

Amazon has a strong hold on the cloud, with a 70%-plus market share. The e-commerce giant had claimed that its AWS, the company’s cloud-computing operation, provided the maximum growth, up 45% year over year to $7.43 billion during the holiday quarter and in the process accounted for around 10% of Amazon’s total revenues.

And now with Apple Inc AAPL being a major customer for its cloud platform, it can easily continue to post promising results this earnings season. And why not? CNBC recently reported that Apple is spending more than $30 million a month on Amazon’s cloud despite building its own data storage device.

Thanks to the blistering growth trajectory of the AWS segment, analysts widely expect Amazon to post $4.61 a share of earnings, up from $3.27 reported a year ago.

 

Analysts’ consensus estimates call for revenues of nearly $59.7 billion, up about 17% from the same period last year.

 

This Zacks Rank 2 company has an Earnings ESP of +10.65%. Its expected earnings growth rate for the current year is 32.3%, higher than the Internet - Commerce industry’s estimated gain of 0.6%. In fact, the company has outpaced the broader industry in the past one-year period (+31.7% vs +8.6%).

 

Beyond the Cloud

While it’s true that cloud businesses will likely be in focus as Microsoft and Amazon reports, the software giant’s Xbox videogame offering should stand in good stead. There’s also optimism on Wall Street about the Microsoft office platform as well.

And when it comes to Amazon, the company’s lucrative advertising business will play a significant part in improving overall revenue growth. Amazon has already launched an ad-supported streaming channel, FreeDive via IMDb and an ad-supported music service for Alexa-enabled devices. To top it, U.S. confident consumers will surely boost Amazon’s online retail and Whole Foods businesses.

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