Will The Rally In Microsoft Stock Continue Going Into Q4 Earnings? Microsoft Corporation (NASDAQ:MSFT)

Microsoft Corporation (NASDAQ:MSFT) stock has risen consecutively for 7 sessions. Will MSFT stock continue to rise going into Q4 earnings?

After ending June on a disappointing note, shares of Microsoft Corporation (NASDAQ:MSFT) have bounced back to gain nearly 8% in the month of July. MSFT stock has risen consecutively for seven straight sessions. This rapid rise in such a short time frame is a little overwhelming, since the stock had only gained 11% from Jan upto June end. This compares with a 14.07% rise in the Nasdaq Composite (INDEX:COMPX), indicating that MSFT stock had underperformed the market benchmark. However, this momentum has pushed the stock’s YTD returns above the NASDAQ returns. Microsoft is scheduled is to report fourth-quarter fiscal 2017 results on July 20, after markets close. Will the rally continue going into Q4-2017 earnings? Let’s take a closer look to know how things stand for Microsoft.

What to expect in Microsoft Q4 2017 earnings?

In Q3 2017, the tech giant beat estimates by 3 cents but missed revenue estimates by some $60 million. For Q4, some analysts are very optimistic about the company’s prospects. Wall Street estimates suggest that the company could report a revenue of $24.26 billion for the fourth quarter, translating to a YoY growth of 7.2%. Microsoft’s segment wise guidance for the fourth quarter adds up to to a revenue guidance range of $23.8 billion to $24.5 billion. On the earnings front, Street expects the company to post a Non-GAAP earnings per share of 71 cents, representing a marginal 3% YoY rise. Though the earnings whisper, Wall Street’s unofficial view, hints at an earnings beat with the company reporting an EPS of 75 cents.

The performance of the company’s multi-billion dollar acquisition LinkedIn (NYSE:LNKD) will also be watched. The tech giant gave a guidance of approximately $1.05 billion as revenue from LinkedIn. A recent Gartner report on PC sales stated that there was a 4.3% YoY drop for the quarter in unit shipments, 11th straight quarter of declining shipments. The firm’s data also suggested that the June quarter had the lowest volume of PC sales since 2007. After this report, analysts are a little skeptical about the performance of the company’s More Personal Computing segment, and some feel it could be a drag on the company’s top line. The company had provided an outlook of $8.4 billion to $8.7 billion for this segment.

All eyes on Microsoft Azure performance.

Under Satya Nadella’s leadership, Microsoft has turned into a cloud centric tech company. The company has also returned to growth with its special focus on cloud and AI. With Q4 2017 earnings, the company could complete one full fiscal year of revenue growth after being plagued by negative growth in the past. Microsoft’s cloud offering Azure continues to grow at a rapid pace and the company’s Commercial Cloud annualized revenue run rate now exceeds $15.2 billion, as of Q3. The company’s Intelligent Cloud segment had delivered approximately $6.8 billion in revenue last quarter. Azure revenue had increased 94% in constant currency in Q3. Azure premium revenue grew in triple digits for 11th consecutive quarter and the company claims 80% of Azure customers were using their premium services.

Analysts are also gung-ho about Microsoft’s Cloud business. Credit Suisse analyst Michael Nemeroff recently raised his MSFT stock price target from $80 to $84 and called the stock a top pick going into earnings on account of its cloud business, which he expects to do better than what the Street expects. Nemeroff in his note wrote, “Our Outperform thesis on MSFT shares is centered on what we view as significant earnings power potential over the next few years, [Earnings potential] could be unlocked from (1) strong commercial cloud growth and (2) higher cloud gross margins due to economies of scale.” The company had issued a revenue guidance of $7.2 billion to $7.4 billion for its Intelligent Cloud segment.

Playing MSFT stock ahead of earnings.

Microsoft stock’s recent rally has not made it completely overbought. The current Relative Strength Index (RSI) measure of the stock is 63.28, still below the commonly used overbought threshold of 70. However, the share price has breached the upper Bollinger Band to signal an overbought condition. Generally, a combination of above two technical indicators is considered as a strong signal. Further, the investor sentiment is very high for an earnings beat. A private survey suggests a 76% chance of an earnings beat and price spike after earnings. MSFT stock also has a history of outperforming after earnings. However, a Schaeffer’s investment research post suggests that there has been a noticeable increase in Microsoft put option buying in the past two weeks at a faster-than-usual clip. May be the recent rally has also made some investors cautious, and the post states that this could be mostly protective puts buying by Microsoft shareholders, to play safe in case the stock turns for a worse. For now, the rally in Microsoft stock is likely to continue going into earnings.

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