Microsoft Corporation (Nasdaq: MSFT) is expected to report its fiscal third-quarter earnings after the market close on Thursday afternoon, and analysts have high hopes for Microsoft’s cloud business and its stock.
Analysts are expecting Microsoft to report adjusted earnings per share of 85 cents on revenue of $25.7 billion for the quarter.
Bank of America analyst Kash Rangan says Microsoft investors should expect the company to beat those consensus estimates on Thursday and raise its guidance for the rest of the year. Rangan is calling for adjusted EPS of 90 cents on $26.2 billion in revenue.
[See: 8 Ways to Build a Low-Cost Portfolio for Social Change.]
Perhaps most importantly, Bank of America estimates Microsoft Azure revenue grew 80 percent in the first quarter. Microsoft reported impressive 98 percent year-over-year growth in Azure revenue in the fiscal second quarter. Rangan also predicts commercial cloud gross margins expanded to 56 percent from 55 percent last quarter.
For the full fiscal year 2018, Bank of America is calling for EPS of $3.75 on revenue of $107.7 billion, above consensus estimates of $3.67 and $107.6 billion, respectively.
Bank of America is forecasting calendar-year 2019 EPS of $4.23, but Rangan says Microsoft can more than double its EPS over time thanks to its cloud business. Bank of America is forecasting free cash flow per share of $8.50 by 2023 and EPS of least $8 by 2025.
“Our long-term thesis is that the cloud business has an incremental tailwind of $10 billion to $15 billion in gross profits over the next three years,” Rangan says.
Morningstar analyst Rodney Nelson also says Azure numbers are particularly critical for long-term Microsoft investors.
“We view Microsoft’s public cloud offering Azure as a multifaceted service that not only provides substantial growth opportunities, but also serves as a natural hedge from potential declines in other aspects of the business,” Nelson says.
[See: 10 of the Best Tech ETFs to Own.]
Amazon.com ( AMZN) AWS currently has a $20 billion annual revenue run rate, which dwarfs Azure’s $6.5 billion run rate. However, Azure’s revenue growth has roughly doubled AWS’s in recent quarters.
“We believe Microsoft has established itself as the clear number-two player in this market and is closing the gap on front-runner Amazon,” Nelson says.
Bank of America has a “buy” rating and $116 price target for Microsoft. Morningstar has a “fairly valued” rating and $106 fair value estimate for MSFT stock.
More from U.S. News
9 Growth Funds That Will Turbocharge Your Portfolio
The 10 Best Ways to Buy Tech Stocks
High-Tech Investing: 7 Sectors to Watch
Azure Could Make or Break Microsoft Corporation (MSFT) Earnings originally appeared on usnews.com
