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Will Microsoft's (MSFT) Cloud Segment Drive Its Q1 Earnings?

Christopher Vargas

Microsoft MSFT is set to report its first quarter fiscal 2020 results after the closing bell on Wednesday, October 23. The software giant has seen its shares rise over 35% in 2019, easily outperforming the broader software market’s 15.3% run. MSFT stock is currently trading around 3 percent under its 52-week high of $142.37 and a strong quarterly performance may drive the stock to a new high.

Microsoft’s cloud segment, Azure, has been a key catalyst for the company’s recent strong performance. Investors will be looking for something that will set the tone for a strong fiscal year. Let’s take a closer look at Microsoft’s cloud segment and how the firm might report its Q1.

Cloud Tech Dominates

In the fourth quarter of fiscal 2019, Microsoft reeled in $33.7 billion in revenue, and the intelligent cloud business became the tech giant’s largest revenue generator. The cloud segment brought in $11.4 billion, gaining 19% from the year ago quarter.

This was driven by the server products and cloud services revenue that climbed 22%, while Azure's growth stole the show with its 64% surge. While Azure may still be second to Amazon’s AMZN Amazon Web Services, Azure has been growing faster than AWS, which has helped it close the gap.

AT&T T and Microsoft announced a major multiyear, $2 billion partnership to help the telecommunications giant accelerate its transition to the cloud. AT&T is moving its non-network workloads to Azure while using Office 365 for productivity and collaboration. As more companies continue to transition their technology infrastructure to the cloud, tech giants like Microsoft and Amazon are poised to earn much of that business throughout the secular shift.

Outlook

According to research and advisory company Gartner IT, more than one-third of companies see the cloud as a top three investing priority, which should drive the overall public cloud market to more than $331 billion by 2022, up from just $182 billion last year.

Our Q1 consensus estimates forecast Microsoft to see a 10.83% gain in revenue to $32.23 billion, while earnings are expected to grow 9.65% to $1.25 per share. The productivity and business segment is projected to bring in $10.87 billion for an 11.3% jump, while personal computing could pop 1.92% to $10.95 billion. The intelligent cloud segment is expected to be the largest growing segment again in Q1, with a 21% Y/Y surge to $10.37 billion.

Looking ahead to the tech giant’s full fiscal 2020 figures, our estimates anticipate Microsoft’s bottom-line to gain 9.68% to $5.21 per share while sales increase 10.69% to $139.29 billion. The productivity and business and personal computing segments are projected to make respective gains of 11.67% and 3.22%. Intelligent cloud is forecasted to grow a solid 18.58% to $46.2 billion.

Bottom Line

As demand grows for integrating cloud computing and AI within a company’s business, investors can expect cloud leaders like Microsoft to reap the benefits of the secular shift. If the company’s gains in its cloud computing segment continue in its upcoming earnings release, then it may be enough to send the stock to new highs. Microsoft currently sits at a Zacks Rank #3 (Hold) with a Style Score of A in Growth.

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