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What to Expect from Microsoft’s Q2 Earnings

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Microsoft (NASDAQ:MSFT) stock rose 0.56% on January 17 and closed at $167.10. The stock was trading 0.2% below its 52-week high of $167.47. Meanwhile, the stock was trading 63.6% above its 52-week low of $102.17. At the closing price on January 17, the stock had a market capitalization of $1.27 trillion.

Microsoft stock has gained 57.5% in the last 12 months. The S&P 500 Index rose 24.7%. Oracle (NASDAQ:ORCL) and IBM (NYSE:IBM) have gained 13.5% and 13.2%, respectively.

Microsoft is scheduled to report its earnings for the second quarter of fiscal 2020 on January 29 after the closing bell.

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Microsoft’s Q2 expectations

In the second quarter of fiscal 2020, Microsoft expects to generate total revenues of $35.15 billion–$35.95 billion. The average revenues are $35.55 billion—lower than its revenues of $33.06 billion in the previous quarter. In the second quarter of fiscal 2020, the foreign currency will likely dent the total revenue growth by around one percentage point. The company also expects the cost of goods sold to rise to $12.45 billion–$12.65 billion.

Wall Street analysts expect Microsoft to report revenues of $35.69 billion in the second quarter—a rise of 9.9% YoY (year-over-year) compared to $32.47 billion in the second quarter of fiscal 2019. Also, analysts expect the company’s adjusted earnings to rise by 20% YoY to $1.32 per share in the second quarter.

Analysts expect Microsoft’s revenues to rise by 11.5% in fiscal 2020 to $140.35 billion. The sales will likely rise by 11.3% in fiscal 2021 to $156.27 billion. The adjusted earnings are also expected to rise by around 13.7% in fiscal 2020 to $5.40 per share. However, the profits are expected to rise by 12.4% to $6.07 per share in fiscal 2021.

IBM will report its fourth-quarter results today. In the quarter, analysts expect the company’s adjusted EPS to fall 3.7% YoY to $4.69. IBM’s revenues could fall 0.6% YoY to $21.6 billion.

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Analysts’ recommendations and target price for Microsoft

Among the 35 analysts covering Microsoft stock, 33 have a “buy” rating, while two have a “hold” rating. However, none of the analysts have a “sell” rating.

Currently, analysts have a 12-month target price of $171.52 on Microsoft stock. On January 17, the stock was trading at a discount of 2.6% to analysts’ 12-month target price. The median target price was $174.00 on the same date.

On January 20, Stifel analyst Brad Reback maintained his “buy” rating on Microsoft stock and raised his price estimate to $175 from $160. The revised target price implies a 4.7% upside for the stock. According to TheFly, “Channel checks point to an overall healthy IT spending environment, says the analyst, who sees upside to his earnings per share estimate of $1.32 and revenue estimate of $35.68B. Further, Microsoft’s comps generally ease in Q2, although comps generally get harder in Q3.” The report also said, “The analyst believes double digit revenue, operating income and free cash flow growth is sustainable for Microsoft in fiscal 2020 and beyond. He remains a buyer of the stock and expects near-term gains to be incremental given the sheer size of the company.”

Today, RBC increased Microsoft’s target price from $163 to $180. Evercore ISI also increased the target price from $170 to $180.

Microsoft stock’s valuation

Microsoft has a forward PE ratio of 30.97x for fiscal 2020 and 27.55x for fiscal 2021. The stock might appear expensive compared to an expected 13.7% adjusted EPS increase in fiscal 2020. Analysts expect Microsoft’s earnings to rise at a compound annual growth rate of 14.50% in the next five years.

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Technical analysis

Based on the closing price on January 17, Microsoft stock was trading 4.4% above its 20-day moving average of $160.10. The stock is also trading 8.4% above its 50-day moving average of $154.16 and 14.0% above its 100-day moving average of $146.53.

Microsoft’s 14-day RSI (relative strength index) score is 75. The score suggests that the stock is overbought. The company’s upper, middle, and lower Bollinger Band levels are $166.13, $160.10, and $154.08, respectively. On January 17, the stock closed near its upper Bollinger Band level, which also suggested that it’s overbought.

Analysts expect Microsoft’s free cash flow to rise 20.6% YoY to $6.3 billion in the second quarter of fiscal 2020. The company’s operating cash flow will likely increase by 12.4% YoY to $10.0 billion.

Analysts expect Microsoft to return $3.65 billion to shareholders in the form of dividends in the second quarter of fiscal 2020. On January 17, the company’s dividend yield was 1.22%. Read Microsoft Gains on Analyst Upgrades and Strategic Moves and An Attractive Entry Level for Microsoft Stock? to learn more. You can also read Amazon Puts Pressure on Microsoft in JEDI Contract Dispute.

Stay tuned to learn how Microsoft performed in the second quarter of fiscal 2020.

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