U.S. Markets closed

Will Microsoft Continue to Trudge Higher When It Reports Earnings?

Danny Vena, The Motley Fool

Earlier this year, Microsoft (NASDAQ: MSFT) crossed a benchmark that had only ever been surpassed by two other U.S. publicly traded companies: attaining a market cap of $1 trillion on the day following its most recent financial results. Unlike Apple and Amazon.com, who both achieved this distinction sooner, Microsoft has been able to stay atop the lofty yardstick, with its stock gaining 37% so far this year.

The catalyst that pushed Microsoft over the top was strong growth from its Windows operating system and cloud computing segments.

The company is scheduled to report the results of its fiscal fourth quarter (which ended on June 30) after the market close on Thursday, July 18. Will Microsoft be able to maintain its upward trajectory, or will gravity pull the stock back down to Earth? Let's take a look at several areas to watch.

The Microsoft logo outside its headquarters building

Image source: Microsoft.

Revenue

Microsoft's fiscal third-quarter revenue climbed 14% year over year, easily exceeding analysts' consensus estimates, which called for 11.3% gains, while also surpassing the high end of management's forecast, which topped out at a 12.3% increase.

For the second quarter, management guided for revenue in a range of $32.2 billion to $32.9 billion. At the midpoint of this range, it would result in year-over-year growth of 8%. Given that Microsoft has historically been conservative with its forecast, the company could actually exceed its guidance range.

To put that in the context of Wall Street sentiment, analysts' consensus estimates are looking for revenue of $32.75 billion, or growth of about 9% year over year. 

Cloud computing

One of the key drivers of Microsoft's success in recent years has been its rise in the cloud computing marketplace. Earlier this year, numbers from Synergy Research Group showed that while Amazon Web Services (AWS) was still the cloud leader, Microsoft's Azure cloud was gaining ground. Even more important is that Azure was the fastest growing among the cloud leaders, as it further closed the gap with AWS. 

The intelligent cloud segment was Microsoft's best performer last quarter, up 22% compared to the prior-year quarter. This growth was led by Azure, with revenue that soared 73% year over year, and 75% adjusting for the impact of foreign currency exchange rates.

Look for continued strong performance from Azure.

Profits

One of the eye-openers last quarter was the strength of Microsoft's bottom line, for even as revenue grew by 14%, net income and earnings per share (EPS) climbed by 19% and 20% year over year, respectively. This is a testament to the company's ability to control costs even as it works to grow sales.

While the company doesn't provide per-share guidance, analysts' consensus estimates are looking for EPS of $1.21, which would represent an increase of about 7%. Given Microsoft's history of profits outpacing revenue growth, investors shouldn't be surprised to see the same thing happen again this quarter.

Microsoft is scheduled to report earnings after the market close on Thursday, July 18.

More From The Motley Fool

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Danny Vena owns shares of Amazon and Apple and has the following options: long January 2021 $190 calls on Apple and short January 2021 $195 calls on Apple. The Motley Fool owns shares of and recommends Amazon, Apple, and Microsoft. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.