Could Microsoft’s Q3 Earnings Report Boost Its Stock?

Today at 5:33 AM ET, Microsoft (NASDAQ:MSFT) stock rose 1.3% to $176.24 in the pre-market session. The company will likely report its earnings for the third quarter of fiscal 2020 on Wednesday after the closing bell. The quarter ended on March 31. Microsoft stock fell 0.3% on Monday and closed the trading session at $174.05. Notably, the stock was trading 8.7% below its 52-week high of $190.70 and 46.3% above its 52-week low of $119.01. At the closing price on Monday, Microsoft had a market capitalization of $1.32 trillion.

On Monday, the S&P 500 and the Dow Jones rose by 1.47% and 1.51%, respectively. Apple (NASDAQ:AAPL), Oracle (NASDAQ:ORCL), and IBM (NYSE:IBM) gained 0.1%, 0.7%, and 1.0%, respectively, on the same day.

Microsoft’s Q3 expectations

In the third quarter of fiscal 2020, Microsoft expects its total revenues to be $34.10 billion–$34.90 billion. The foreign currency will likely decrease the revenue growth by one percentage point during the quarter. Microsoft expects the cost of goods sold to be between $11.05 billion and $11.25 billion in the third quarter. The company also expects operating expenses of $11.2 billion–$11.3 billion.

According to Wall Street analysts, Microsoft could post revenues of $33.64 billion in the third quarter—a rise of 10.0% YoY (year-over-year) compared to $30.57 billion in the third quarter of fiscal 2019. Analysts expect the company’s adjusted earnings to rise by 10.5% YoY to $1.26 per share in the third quarter of fiscal 2020.

Analysts also expect Microsoft’s revenues to rise by 11.3% YoY in fiscal 2020 to $140.10 billion. The sales will likely rise by 11.3% YoY in fiscal 2021 to $156.00 billion. The adjusted earnings could rise by 16.6% YoY in fiscal 2020 to $5.54 per share. However, the profits will likely rise by 10.6% YoY to $6.13 per share in fiscal 2021.

Analysts’ recommendations for Microsoft stock

Based on Reuters data, among the 35 analysts tracking Microsoft stock, 32 recommend a “buy,” while three recommend a “hold.” None of the analysts recommend a “sell.” Analysts’ mean target price on the stock is $186.61, which implies a 7.2% gain from the current level of $174.05. The consensus target price for the stock has fallen from $189.42 in March—a fall of 1.5%.

On Monday, Jefferies analyst Brent Thill maintained his “buy” rating on Microsoft stock and raised his price estimate to $200 from $175. The revised target price implies a 15% upside for the stock. According to a report from TheFly, “The analyst says the company is among the best pillars in software over the longer term, but its upcoming Q3 results and Q4 outlook could be mixed between amazing Azure/Xbox/Team prodcuts and weakness from Windows OEM and on-prem license weakness.” The report also said, “Thill adds that with the stock having outperformed the market, the risk going into earnings is more elevated, even though he still sees the company as well positioned for durable long term growth.”

Apple, Oracle, and IBM have average broker target prices of $303.15, $50.27, and $127.29, respectively. These figures imply returns of 7.1%, -5.8%, and 1.1%, respectively, over the next 12 months.

Peer comparison

Last week, IBM released its first-quarter results for the quarter ended in March. The company reported revenue of $17.57 billion—a 3.4% reduction from $18.2 billion in the first quarter of 2019. The company missed analysts’ consensus estimate of $17.62 billion. IBM’s adjusted EPS of $1.84 was above analysts’ estimates of $1.80 per share in the first quarter. However, the company reported an adjusted EPS of $2.25 in the first quarter of 2019. Read Is IBM Stock a ‘Sell’ after Its Q1 Earnings? to learn more.

Apple will release its earnings report for the second quarter of fiscal 2020 on Thursday. The quarter ended on March 31. Analysts expect the company’s second-quarter reported revenue to fall by 6% YoY to $54.5 billion. They expect the company to post an adjusted EPS of $2.26 compared to $2.46 in the second quarter of fiscal 2019.

Microsoft’s stock returns

Based on the closing price on Monday, Microsoft stock was trading 4.2% above its 20-day moving average of $167.07. The stock is also trading 7.0% above its 50-day moving average of $162.64 and 6.7% above its 100-day moving average of $163.07.

Microsoft’s 14-day relative strength index score is 57. The score suggests that the stock isn’t overbought or oversold. The company’s upper, middle, and lower Bollinger Band levels are $182.74, $167.07, and $151.39, respectively. On Monday, the stock closed near its middle Bollinger Band level, which also suggests that it isn’t overbought or oversold.

Microsoft has forward PE ratios of 31.39x for fiscal 2020 and 28.39x for fiscal 2021. Compared to an expected 16.6% non-GAAP EPS growth in fiscal 2020 and the stock might appear expensive. Wall Street analysts expect Microsoft’s earnings to rise at a CAGR of 14.6% in the next five years.

In the third quarter of fiscal 2020, analysts expect Microsoft’s free cash flow to rise 3.9% YoY to $11.4 billion. The company’s operating cash flow will likely increase by 11.0% YoY to $15.0 billion. In the third quarter of fiscal 2020, analysts expect Microsoft to return $3.87 billion to shareholders in the form of dividends. On Monday, the company’s dividend yield was 1.17%.

Read Is Microsoft Stock a Good Option for Investors? and Microsoft Stock: 2 Things Investors Should Know to learn more.

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