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Why Microsoft Stock Could Rise on Q2 Earnings Beat

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On Wednesday, Microsoft (NASDAQ:MSFT) released its earnings for the second quarter of fiscal 2020 after the closing bell. The quarter ended in December 2019. Notably, the stock rose 4.14% in after-hours trading on the same day.

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Microsoft’s Q2 earnings

The company generated revenue of $36.9 billion—an increase of 13.7% from the second quarter of fiscal 2019. Microsoft beat Wall Street analysts’ consensus estimate of $35.68 billion. The company posted an adjusted net profit of $11.65 billion during the quarter—a 35.8% rise YoY (year-over-year). On an adjusted diluted EPS basis, the company made $1.51 per share—much higher than analysts’ estimates of $132.

The revenue from Microsoft’s Intelligent Cloud segment, which includes Azure, GitHub, and Enterprise Services, rose 26.6% YoY to $11.87 billion—more than analysts’ consensus estimate of $11.40 billion. In the second quarter of fiscal 2020, the Intelligent Cloud segment represented 32.2% of the company’s overall revenue. Meanwhile, in the second quarter of fiscal 2019, the Intelligent Cloud segment only accounted for 28.9% of Microsoft’s total revenue.

The revenue from Microsoft’s Productivity and Business Processes segment, which includes Office 365, LinkedIn, and Dynamics, rose 17.1% YoY to $11.83 billion—more than analysts’ consensus estimate of $11.42 billion. Notably, the revenue from LinkedIn grew by 24% YoY.

The revenue from Microsoft’s More Personal Computing segment, which includes Windows, Xbox, Surface, and Bing, only grew by 1.7% YoY to $13.2 billion—more than analysts’ consensus estimate of $12.85 billion.

According to a CNBC report, “Azure growth for the quarter came in at 62%, decelerating from 76% a year ago but beating an estimate from Goldman Sachs analysts, who predicted growth of 58%, and accelerating from the prior quarter.”

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The report also said, “The most high-profile win for Azure in the quarter came from the U.S. Department of Defense, which awarded the controversial Joint Enterprise Defense Infrastructure cloud contract to Microsoft, worth up to $10 billion over a decade. Additionally, rival Salesforce said it would tap Azure to run its Marketing Cloud service.”

Q3 expectations

In the third quarter of fiscal 2020, Microsoft expects to generate total revenues of $34.10 billion–$34.90 billion. The average revenues are $34.50 billion—lower than its revenues of $36.91 billion in the previous quarter. In the third quarter of fiscal 2020, foreign currency will likely dent the consolidated revenue growth by about one percentage point. The company expects the cost of goods sold to be in the range of $11.05 billion–$11.25 billion. Microsoft expects operating expenses of $11.2 billion–$11.3 billion in the third quarter of fiscal 2020.

For fiscal 2020, Microsoft expects its operating expenses to increase by 10%–11% YoY. The company also expects the operating margin to be up by around two percentage points YoY.

Wall Street expects Microsoft to report revenues of $34.20 billion in the third quarter—a rise of 11.9% YoY compared to $30.57 billion in the third quarter of fiscal 2019. Also, analysts expect the company’s adjusted earnings to rise by 9.6% YoY to $1.25 per share in the third quarter.

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Analysts expect Microsoft’s revenues to rise by 11.7% in fiscal 2020 to $140.55 billion. The sales will likely rise by 11.4% in fiscal 2021 to $156.63 billion. The adjusted earnings are also expected to rise by around 14.3% in fiscal 2020 to $5.43 per share. However, the profits are expected to rise by 12.3% YoY to $6.10 per share in fiscal 2021.

Analysts revised Microsoft’s target price

Many analysts revised their target price for Microsoft stock after the earnings results for the second quarter of fiscal 2020.

  • Evercore ISI increased its target price from $180 to $190.
  • Jefferies increased its target price from $185 to $195.
  • J.P. Morgan increased its target price from $169 to $200.
  • Citigroup increased its target price from $155 to $174.
  • RBC increased its target price from $180 to $200.
  • Piper Sandler increased its target price from $190 to $199.
  • Wells Fargo increased its target price from $185 to $205.
  • Wedbush increased its target price from $195 to $210.
  • Cowen and Company increased its target price from $180 to $200.
  • Mizuho increased its target price from $180 to $195.

Microsoft is covered by 34 Wall Street analysts. Among the analysts, 32 recommend a “buy” and two recommend a “hold.” Analysts’ mean target price on the stock is $188.03, which implies an 11.9% gain from the current level of $168.04. The lowest target price estimate is $133, while the highest is $205.00.

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Peer comparison

In the fourth quarter of 2019, IBM (NYSE:IBM) reported revenues of $21.8 billion, which implies a rise of 0.1% YoY. Also, the company reported an adjusted EPS of $4.71 in the fourth quarter, which implies a fall of 3.3% YoY.

In the second quarter of fiscal 2020 (quarter ending in November 2019), Oracle (NASDAQ:ORCL) reported revenues of $9.62 billion, which implies a rise of 0.5% YoY. The company posted an adjusted EPS of $0.90 in the second quarter, which implies a rise of 12.5% YoY.

Stock performance

Microsoft stock rose 1.56% on Wednesday and closed at $168.04. The stock was trading 0.4% below its 52-week high of $168.75. Meanwhile, the stock was trading 64.2% above its 52-week low of $102.35. At the closing price on Wednesday, the stock had a market cap of $1.28 trillion.

Based on the closing price on Wednesday, Microsoft stock was trading 3.1% above its 20-day moving average of $162.93. The stock is also trading 7.1% above its 50-day moving average of $156.90 and 13.1% above its 100-day moving average of $148.52.

Microsoft’s 14-day RSI (relative strength index) score is 65.96, which shows that the stock isn’t overbought or oversold. The company’s upper, middle, and lower Bollinger Band levels are $169.37, $162.93, and $156.49, respectively. On Wednesday, the stock closed near its upper Bollinger Band level, which suggests that it’s overbought.

Microsoft stock has gained 63.2% in the last 12 months. The S&P 500 Index rose 22.1%. Oracle and IBM have gained 7.2% and 2.5%, respectively.

Microsoft returned $3.89 billion to shareholders in the form of cash dividends in the second quarter of fiscal 2020. On Wednesday, the company’s dividend yield was 1.21%.

Read Microsoft Stock Could Grow 26% in 2020 and An Attractive Entry Level for Microsoft Stock? to learn more.

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