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Microsoft Reports Earnings on Wednesday: 3 Key Themes to Watch

Spoiler alert: It's all about the cloud.
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Microsoft’s next earnings are around the corner -- does the tech giant still have room to run?

With a market cap of about $1.24 trillion as of Monday, Microsoft  (MSFT)  is the second most valuable tech stock in the world right now, behind Apple  (AAPL) . But many investors see more upside ahead for Microsoft shares in 2020.

For the December quarter, analysts polled by FactSet expect earnings of $1.32 per share on revenue of $35.67 billion. Microsoft is due to report earnings on Wednesday, Jan. 29 after close of trading.

Here are a few key themes to watch for.

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1. Azure Gains

The back half of 2019 provided plenty of fodder for anyone feeling bullish on Microsoft Azure, despite its second-place position behind Amazon’s AWS. For one, Microsoft earned a sought-after Pentagon cloud contract worth $10 billion that some viewed as a bellwether for the company’s cloud ambitions. In a note, Wedbush analyst Dan Ives estimated that Microsoft could top expectations for its commercial cloud business by 3% to 4%. But Azure isn’t a monolith, and there’s a lot that investors can learn about what specific offerings are gaining traction, and why: In a recent survey, Morgan Stanley found that Microsoft is the preferred hybrid cloud vendor of 42% of CIOs, compared to 21% for AWS. Microsoft’s results on Wednesday could help shed more light on the outlook for Azure.

  • 2. Cloud Services
  • Growth in Microsoft’s commercial cloud business doesn’t happen in a vacuum -- Azure and other Microsoft's enterprise applications, like Office 365, go hand in hand. According to Ives, Microsoft’s growth over the next 12 to 18 months will be driven in part by accelerated migrations to Office 365, Microsoft’s ubiquitous productivity suite. Microsoft’s cloud momentum “is still in its early days of playing out within the company’s massive installed base, the Office 365 transition for both consumer/enterprise is providing growth tailwinds over the next 12 to 18 months (at least), and newer integrated product initiatives around consumers and cloud services,” such as LinkedIn, he wrote. Through results and commentary on Office 365 and other cloud initiatives, investors could learn more about the big picture in Microsoft's cloud gains. 

    3. Sweet, Sweet Cash 

    Microsoft's isn't hurting for cash -- it has around $67 billion in cash in addition to $200 billion in operating cash flow over the next three years. What it plans to do with it is a subject of some speculation. In a recent note, Piper Sandler analyst Brent Bracelin wrote that Microsoft may opt for "needle-moving M&A" in the coming year and beyond: “With less than 5% market share in business-application software across front-office and back-office segments, MSFT has many options to enhance its position as a trusted enabler of the digital enterprise beyond Azure, Office 365, LinkedIn and GitHub,” he wrote, surmising that Microsoft's performance this year could help define the company for the next decade. Investors can expect to hear more about Microsoft's big vision.