Under CEO Satya Nadella, Microsoft Corp. (MSFT) has undergone a financial and technological revival as he's focused on fast-growing, high-margin businesses including cloud services, while reshaping the company's traditional product lines. That success is illustrated by the company's nearing $1 trillion in market value as the stock has risen about 34% in 2019, nearly double the pace of the S&P 500.

What Investors Will Watch For

Now, investors will be watching closely to see if the company can keep profits and sales rising for cloud services and other key revenue drivers as the U.S. and global economy slow when it reports quarterly earnings in mid-July. Investors also will be looking closely at Microsoft's cloud margins as well as the outlook for its non-cloud businesses such as Microsoft Word, Xbox, streaming video games, and other businesses. A key focus will be the health of Windows, which saw sales to PC makers grow 9% last quarter, reversing a 5% decline in the previous three-month period.

A Slow-Growth June Quarter

At the moment, analysts estimate that growth downshifted in the latest quarter ended June. They expect Microsoft to post earnings per share of $1.21, marking a 7.1% increase from year-ago EPS at $1.13, per Yahoo Finance. Revenue is forecast to come in at $32.75 billion for the quarter, an 8.8% jump from the $30.09 billion reported in the same quarter last year. 

That amounts to sharp slowdown in growth from the company's March quarter, when Microsoft beat analysts' expectations with earnings of $1.14 per share, reflecting a 14% upside surprise. For the period ended March, the company posted revenue up 14% YOY to $30.6 billion. Better-than-expected top and bottom line numbers were fueled by the growth of Microsoft’s cloud computing business, called Microsoft Azure, which won over some major corporate clients in the period, such as Kroger Co. (KR) and Exxon Mobil Corp. (XOM). 

The Cautious View

That slowing growth supports the caution of bears like Jefferies analyst John DiFucci, according to a detailed story in Barron's. DiFucci says Microsoft stock will lag the broader market as it posts weaker than expected profits for Azure, which he says are unlikely to ever match Amazon's. “Azure will probably never see the margin broadly expected due to cultural and technical factors,” DiFucci wrote. “We believe there is material risk that Azure margins never attain those of AWS [and that] the cash flow benefit from Windows...outperformance isn’t sustainable.”

The Optimists' View

Many analysts forecast that Microsoft can maintain its rapid growth longterm despite any slowdown in the June quarter. Bulls argue that Microsoft has been gaining on Amazon.com Inc.’s (AMZN) leading cloud business. Last quarter, Microsoft's cloud computing services revenue from Azure jumped 73%, albeit slower than the 76% posted in the previous quarter. And revenue from Microsoft's overall cloud business, which includes software such as Office 365, grew 41%. 

“Microsoft has distinct advantages in portions of the market that should give the company the ability to reach, over time, revenue that is not that dissimilar to that of Amazon AWS [ Amazon Web Services ],” wrote Bernstein’s Mark Moerdler, per Barron’s. He foresees Microsoft generating over $140 billion in cloud computing sales in the long-term, grabbing a piece of a market he estimates is worth between $900 billion to $1.2 trillion. 

Microsoft will need to show growth like that to keep its profits - and share price - surging.