When Microsoft Corporation (MSFT) reports earnings on Tuesday, expectations will run high. Once an also-ran in the tech industry and the subject of much derision, the company is flying high these days. It surpassed the $1 trillion market capitalization milestone in 2019. The pandemic shutdown further supercharged demand for Microsoft's products, and the company crossed the $2 trillion figure in June this year, becoming the second organization in history to do so.

Key Takeaways

  • Analysts expect another round of blockbuster earnings from Microsoft on Tuesday.
  • They are expecting double-digit gains for the company's cloud and productivity software divisions.
  • Microsoft's gaming revenues could be hurt by supply constraints.

Microsoft has beaten analyst expectations for its earnings in the past four quarters, and its share price recently reached an all-time high of $284.55 after Citi analyst Tyler Radke set a $378 price target for it.

Radke is not the only one betting on sustained demand for Microsoft's products. Bank of America analyst Brad Sills has set a $325 price target for the stock and stated that the company's revenue will beat consensus estimates by 2% to 3%. It took less than three months for Rosenblatt Securities analyst John McPeake to boost his price target for Microsoft to $333 from $301. In May, he had said that Microsoft was the most important software company on the planet.

The consensus estimate for Microsoft's earnings per share is $1.90. Analysts expect the company to report revenues of $44.1 billion, growth of 15.9% from year ago figures. The company itself has projected revenues of $44.5 billion on the upper end of its earnings scale.

A Growth Story

There are three pegs to Microsoft's revenues: cloud services, productivity software, and a segment that the company calls More Personal Computing, which is a mix of hardware, software, and gaming systems. All three are well placed to capitalize on existing trends.

Microsoft chief Satya Nadella's bet on the cloud in the past decade has paid rich dividends, and the division has become the biggest contributor of revenues to the company's top line. Azure, Microsoft's cloud solution, brings in more revenues than its Windows operating system and witnessed exponential growth during the pandemic. Its sales surged by 50% in the March quarter from the same period a year ago. According to BofA's Sills, it should "surpass 50% growth" this quarter as well. Microsoft is the second biggest cloud provider after Amazon.com, Inc. (AMZN) and according to the latest reports is closing in on the leader.

The Redmond, Washington-based giant shifted focus to the cloud for its best-selling productivity suite a decade ago, when it moved Microsoft Office online. Since then, it has introduced more products for the platform, culminating in the recent announcement of Windows 365.

Demand from the market has been strong. Office 365 had 300 million paid seats last quarter, and Microsoft 365, the company's productivity suite, boasted more than 50 million subscribers. Videoconferencing software Teams, which competes with Zoom Video Communications, Inc. (ZM) had 145 million daily active users.

An increase in IT budgets should provide this segment of Microsoft's business with further ballast to increase revenue, according to analysts. Rosenblatt Securities analyst John McPeake estimates that demand for Office, Teams, and Dynamics is likely to grow in the double digits.

The third segment of Microsoft's business has also witnessed a pandemic lift as work from home policies forced people to buy more and larger devices. The company's gaming division benefitted from a pause in economic activity and office life. Gaming revenues were $3.6 billion, a 50% increase, during the March quarter. Minecraft, an online game that Microsoft purchased for $2.5 billion in 2014, had 140 million active users in the last quarter. But the company has warned that constraints in supply of XBox Series X and S could affect growth in its gaming division.

For all the bullish expectations about the company’s performance, Microsoft itself has already warned that this quarter's performance will be affected by a change in circumstances. This time last year, usage and revenue for Microsoft products skyrocketed due to pandemic restrictions that curbed travel and in-person meetings. In contrast, several geographies in which the company operates have loosened or done away with last year's curbs. During the company's earnings call last quarter, Microsoft CFO Amy Hood said Search and LinkedIn will have positive growth as advertising and job markets return this quarter.