uploads/2020/04/employee-3005501_1280.jpg

Analyzing Software Giant Microsoft’s Q3 Earnings Results

By

Updated

Microsoft (NASDAQ:MSFT) posted its financial results for the third quarter of fiscal 2020 (quarter ended March) on Wednesday after the market close. The stock rose about 5% in after-hours trading on Wednesday. Microsoft beat the top and bottom-line estimates in the third quarter. In the third-quarter press release, Microsoft said that the coronavirus pandemic had a minimal net impact on its sales.

Article continues below advertisement

Microsoft’s Q3 earnings

Microsoft generated revenue of $35.02 billion—an increase of 14.6% from the third quarter of fiscal 2019. The revenue beat Wall Street analysts’ consensus revenue estimate of $33.66 billion. The company posted an adjusted net profit of $10.75 billion during the quarter—a 22.1% rise YoY (year-over-year). In the third quarter, Microsoft reported an adjusted EPS of $1.40 compared to $1.14 in the third quarter of fiscal 2019. The earnings beat analysts’ consensus estimate of $1.26 per share.

The revenue from Microsoft’s Productivity and Business Processes segment, which includes Office, LinkedIn, and Dynamics, rose 14.7% YoY to $11.74 billion—higher than analysts’ consensus estimate of $11.53 billion. Notably, the revenue from LinkedIn grew 21% YoY.

Meanwhile, the revenue from Microsoft’s Intelligent Cloud unit, which contains Azure, GitHub, and server products, grew 27.3% YoY to $12.28 billion—higher than analysts’ consensus estimate of $11.79 billion. In the third quarter of fiscal 2020, the Intelligent Cloud segment represented 35.1% of the company’s overall revenue. In the third quarter of fiscal 2019, the segment accounted for only 31.6% of Microsoft’s total revenue.

The revenue from Microsoft’s More Personal Computing unit, which features Xbox, Surface, Windows, and Bing, rose 3.0% YoY to $11.0 billion—higher than analysts’ consensus estimate of $10.46 billion.

Article continues below advertisement

According to a CNBC report, “The initial impact of Covid-19 on the business was mixed. Cloud products like Teams and Azure saw increased usage as customers shifted to work and learn from home.” The report added, “But on the downside, In the final weeks of the quarter, there was a slowdown in transactional licensing, particularly in small and medium businesses, and a reduction in advertising spend in LinkedIn.”

Growth projection

In the fourth quarter of fiscal 2020, Microsoft expects its total revenues to be $35.85 billion–$36.80 billion. The foreign currency impact could decline the revenue growth by two percentage points during the quarter. Microsoft expects the cost of revenue to be between $11.55 billion and $11.75 billion in the fourth quarter. The company also expects operating expenses of $11.8 billion–$11.9 billion.

Article continues below advertisement

According to Wall Street analysts, Microsoft could post sales of $36.51 billion in the fourth quarter—a rise of 8.3% YoY compared to $33.7 billion in the fourth quarter of fiscal 2019. Analysts expect the company’s adjusted earnings to rise by 0.7% YoY to $1.38 per share in the fourth quarter of fiscal 2020.

Analysts also expect Microsoft’s revenues to surge 11.8% YoY in fiscal 2020 to $140.7 billion. The revenues could increase by 11.0% YoY in fiscal 2021 to $156.2 billion. The adjusted earnings will likely rise by 17.9% YoY in fiscal 2020 to $5.60 per share. However, the profits will likely rise by 9.8% YoY to $6.15 per share in fiscal 2021.

Analysts’ recommendations for Microsoft

Microsoft stock is tracked by 35 Wall Street analysts. Among the analysts, 32 recommend a “buy,” while three recommend a “hold.” None of the analysts recommend a “sell.” Wall Street analysts’ mean target price on the stock is $190.16, which implies a 7.2% gain from the current level of $177.43.

Many analysts revised their target price for Microsoft stock after its third-quarter earnings results.

  • J.P. Morgan increased its target price from $185 to $190.
  • RBC increased its target price from $190 to $196.
  • Credit Suisse increased its target price from $190 to $195.
  • Evercore ISI increased its target price from $190 to $210.
  • Citigroup increased its target price from $167 to $179.
  • Wedbush increased its target price from $210 to $220.
  • BMO increased its target price from $200 to $212.
  • Mizuho increased its target price from $200 to $205.
  • Wells Fargo increased its target price from $185 to $205.
Article continues below advertisement

Peer comparison

In the first quarter ended in March, IBM (NYSE:IBM) reported revenues of $17.6 billion, which implies a YoY fall of 3.4%. Also, the company reported an adjusted EPS of $1.84 in the first quarter, which implies a YoY fall of 18.2%.

In the third quarter of fiscal 2020 (quarter ended February), Oracle (NASDAQ:ORCL) reported revenues of $9.8 billion, which implies a YoY rise of 1.9%. Also, the company posted an adjusted EPS of $0.97 in the third quarter, which implies a YoY rise of 11.5%.

Stock performance

Microsoft stock rose 4.5% on Wednesday and closed at $177.43 with a market capitalization of $1.35 trillion. The stock was trading 7.0% below its 52-week high of $190.70. Meanwhile, the stock was trading 49.1% above its 52-week low of $119.01.

Based on the closing price on Wednesday, Microsoft stock was trading 5.3% above its 20-day moving average of $168.53. The stock is also trading 9.4% above its 50-day moving average of $162.13 and 8.5% above its 100-day moving average of $163.56. Microsoft’s 14-day relative strength index number is 58.5, which suggests that the stock isn’t overbought or oversold.

Microsoft returned $3.9 billion to shareholders in the form of cash dividends in the third quarter of fiscal 2020. On Wednesday, the company’s dividend yield was 1.15%.

On Wednesday, the S&P 500 and the Dow Jones rose by 2.7% and 2.2%, respectively. Oracle and IBM gained 1.3% and 1.9%, respectively, on the same day.

Read Could Microsoft’s Q3 Earnings Report Boost Its Stock? to learn more about Microsoft.

Advertisement

More From Market Realist