Investors have bet that Microsoft (MSFT) - Get Report should benefit, on net, from the Coronavirus pandemic. Now, earnings are around the corner and there are a few questions at least one analyst is weighing.
The stock has risen 10.5% year-to-date, while the S&P 500 has fallen 12%.
Microsoft’s earnings estimates for 2020 and 2021 are little changed relative to the broader market and the software giant remains on track to grow the bottom line at between 10% and 15% for the next several years.
In March, the stock fell as low as $135 a share from $160 to start the year, in a broad and indiscriminate sell-off that came just weeks after the company announced it wouldn’t meet third-quarter guidance because its More Personal Computing segment would see lower sales volumes, as hardware customers couldn’t manufacture in the wake of the pandemic in Asia.
More Personal Computing accounts for roughly one-third of Microsoft’s revenue, but not for long as the business is no long growing, and essentially holding at a flat rate.
Enter Microsoft’s growth businesses.
The tailwinds from the virus -- a work-from-home environment that accelerates enterprises’ move into cloud adoption -- has seen the stock through. Investors have camped out in secular growth trends unaffected or boosted by the virus, like those found in Amazon (AMZN) - Get Report and Netflix (NFLX) - Get Report.
In particular focus for the upcoming fiscal third-quarter 2020 earnings report is the growth of Azure revenue, which has decelerated from above 70% last year to a still-strong plus 50% growth rate expected these days.
Wedbush Securities analyst Dan Ives wrote in a Monday note that 80% to 90% his valuation reflects Azure, Office 365 and the enterprise software services. Ives expects Azure revenue to grow about 55% year-over-year in the quarter.
"We have seen relatively strong cloud deal activity around Azure in the field, as this current remote work from home environment is further catalyzing more enterprises to make the strategic cloud shift with Microsoft the main beneficiary,” Ives wrote. "The Street is focused on cloud growth heading into earnings, Office 365 success, and the Azure growth trajectory.”
Ives said some of Microsoft’s products may take a “haircut” for the next one or two quarters, to the extent that those products are strongly correlated with when businesses scale their spend up or down. But Ives says the vast majority of Microsoft’s offerings are “essential” for businesses.
Microsoft may be trading at a rich multiple -- 31 times next year’s earnings -- but that’s just a tick above where it was to start the year and Wall Street has clearly maintained its assumption of strong earnings growth for the next several years.
The point: Microsoft investors and analysts alike see the positives of the pandemic outweighing the negatives. The earnings report could certainly disappoint as the stock has run-up a bit, but it could also prove investors right in their assumptions.