Will Microsoft (MSFT) Stock Continue To Rally Going Into Q1 Earnings?

Microsoft Corporation (NASDAQ:MSFT) stock could go past the $80 mark ahead of Q1 earnings.

Satya Nadella led Microsoft Corporation (NASDAQ:MSFT) shareholders are a happy lot as the so-called nondescript stock has delivered a return of more than 37% over the last one year. Though one has to concede that Microsoft has fallen out of favor with many investors and lacks the excitement of the ‘FAANG’ stocks. However, MSFT stock still remains an attractive investment. Shares of Redmond, Washington based tech behemoth have gained some momentum going into the first-quarter fiscal 2018 results which the company is set to report on Thursday, 26th October. MSFT stock has set new highs to breach the $600 billion market capitalization for the first time since the dotcom highs. The question now is, can earnings propel Microsoft stock even higher extending the current rally? Should you buy Microsoft stock going into the earnings?

Microsoft Q1 Earnings Wall Street Estimates.

The current Wall Street consensus expects the Satya Nadella company to report a non-GAAP earnings of 72 cents a share, down from an EPS of 76 cents in Q1 2017, a 5.26% YoY decline. On the top line front, Wall Street analysts expect the company to report revenue of $23.53 billion, good for a 5.4% year-over-year growth. The combined revenue guidance of individual segments of the company come in the range of $24.7 billion and $25.4 billion which is well above the analysts’ consensus. This translate into YoY revenue growth of 10.76% at the lower end and  13.9% at the higher end of guidance. It is also likely expected that the company would reach its Commercial cloud annualized revenue run rate target of $20 billion which came in at $18.9 billion in the last quarter.

Microsoft Earnings History And Earnings Whisper.

Microsoft has a strong history of beating Wall Street estimates, having beaten consensus revenue/earnings estimates in 7 of the last 8 quarters. Looking at the more recent earnings history, the company has beaten the top end of Wall Street estimates in two of the last four quarters. Especially, the last quarter EPS beating the high-end estimate by a big 25.64%, implying that Wall Street is yet to warm up to the recent turnaround growth the company currently finds itself in. On the revenue front, the company has just missed the estimates only once in the last 8 quarters. The strong earnings history implies that Microsoft could be in for yet another earnings beat. The case for an earnings beat is also supported by the current MSFT Q1 earnings whisper number, which is currently at $0.76, implying an 4 cent beat. Microsoft stock has rallied hard going into last four earnings but has failed to maintain the momentum following the earnings announcement.

Cloud segment set to drive Microsoft.

As mentioned earlier in the post, Microsoft is all set to hit $20 billion ARR for its Intelligent Cloud segment. What is far more interesting is that among all the major cloud players, the Redmond company has made the biggest market share gain over the last four quarters. It is giving the market leader Amazon (NASDAQ:AMZN) AWS a run for its money. Now, Microsoft holds the second largest cloud market share after AWS. The company’s cloud offering has continued its strong growth which came in at 97% YoY in Q4 2017. It would be expected to continue its hyper growth in the coming quarter as well. Credit Suisse analysts also are betting on the company’s cloud segment and in a recent note, they wrote that Microsoft could post better than expected revenue growth on account of the strong performance of its cloud business.

Playing Microsoft Stock Through Q1 Earnings.

We believe that Microsoft stock is a solid long-term buy, given that the company is making successful turnaround based on its Cloud growth. However, as a word of caution, considering the recent run-up in Microsoft stock price, profit booking following the earnings call cannot be ruled out. Hence, an earnings beat might not necessarily guarantee an upswing in MSFT stock price. Further, the Microsoft stock technical chart suggests that the stock is heavily overbought as per Relative Strength Index (RSI) with a reading of 91.83, well above the overbought threshold of 70. Also, the share price is just a few cents away from the upper Bollinger Band to signal an overbought condition as well. Therefore, long term investors looking to enter into MSFT stock should buy a partial stake in the lead-up to the earnings, and look to add more Microsoft shares in the case of any post-earnings dip. In case of a post-earnings rise in the stock price, investors should adopt a staggered approach to accumulating positions in the stock, given that the technical set up and the recent rise in the stock price, do not rule out the chances for a short-term pullback in Microsoft stock price.

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