One thing is for certain: Analysts continue to remain bullish on Microsoft's cloud services business as yet another mega-cap tech company heads into earnings after the bell Wednesday. Analysts will also be looking for any signs as to whether Intel's recent cloud issues forebode any trouble for Microsoft.
The stock was up 2 percent heading into the results.
In his preview note to clients, Morgan Stanley's Keith Weiss pointed out that, "as IT focus shifts from pure Public Cloud to Hybrid Cloud architectures, Microsoft rises as the best positioned firm in tech."
Trading at 19 times the firm's 2020 estimate, shares are "undervalued with 30 percent upside to our $140" price target, Weiss added.
Kash Rangan from Bank of America was a bit more restrained, saying, "following several years of significant growth and stock price performance, the current macro outlook for slowing worldwide economic growth has some investors we speak to wondering how cyclical Microsoft is, whether its strong growth can continue."
UBS analyst Jennifer Lowe perhaps encapsulated most analysts' feelings, saying, "Microsoft remains one of our favorite names for CY19, offering a balance of top-line growth, margin expansion" and cheap valuation.
Here's what the others expect:
"We expect a beat in FQ2 driven mainly by seasonal strength in MPC segment (Gaming, Surface) and continued tailwinds in server products/Azure... However, we acknowledge the tough comp for the server products and windows segment in 2H... Beyond near-term growth headwinds (which we believe are adequately reflected in consensus expectations for sharply decelerating growth from 19% in Sept 18 to 10% in June 19), MSFT is ahead of sustained double-digit growth that could drive continued stock outperformance, in our view..."
"Prompted by several investor inquiries concerning MSFT's underperformance YTD, we take this opportunity to elucidate the risks into 2019... To be clear, we expect another year of outperformance in the stock with 19% upside to our target price, but recognize 2018's success in high growth areas (Azure, Office 365) and high-margin business segments (Server products, Windows) will likely make for tougher compares ahead... Much of this is not Microsoft specific, but rather our expectations for decelerating growth across the industry in 2019 (See 2019 Software Outlook). In context, we firmly believe MSFT remains a steady long-term compounder, but see the magnitude of overachievement likely moderating in 2019..."
"We anticipate continued strength in Commercial Cloud and ongoing improvement in Azure margins, while 62% total gross margins in the Xbox-heavy December Q should mark the bottom for the year... We believe Microsoft's Commercial Cloud business continues to grow well but investors are increasingly concerned that macro slowing could impact growth in Microsoft's more mature transactional businesses... We think this risk is mitigated by pricing even if units slow and by ongoing success with newer offerings, while valuation at ~21x EV/CY19E FCF looks defensive. MSFT remains one of our favorite names for CY19, offering a balance of top-line growth, margin expansion, and FCF-based valuation support..."
"As Investor Debates Shift to Cyclical Topics, We See an Opportunity to Buy One of the Best Secularly Positioned Companies in Tech... Heading into 2019, investors' concerns are rising on the durability of software growth broadly, and the durability of the more cyclical aspects of the Microsoft portfolio (like PC exposed Windows OEM and Server exposed On-premise Server & Tools) in particular... Our most recent CIO survey fielded in December suggests stable overall software growth into 2019, showed Microsoft a top share gainer of IT budget as workloads shift to the cloud, both today and over the next three years, and improving growth expectations for Microsoft's On-Premise Server Related Products – giving us confidence the strong secular demand trends driving Microsoft's topline should trump potential cyclical headwinds, which may arise in the year ahead..."
"Bottom Line: We are revising our model ahead of MSFT's Q2/19 earnings report... Most of our estimate changes are due to our assumptions for incremental FX headwinds and lower growth in MPC, as well as other minor adjustments. We continue to forecast FY20 revenue growth of ~10%, which could prove to be conservative, and FCF growth in the low double-digits... We are maintaining our $125 target price and Outperform rating on MSFT, which remains one of our three favorite names and core holdings in software..."
"The cloud and digital era coupled with leadership changes have transformed MSFT's model; cloud has risen to 27% of sales ($35B run-rate) from 5% in FY15 ($5B)... We expect continued cloud strength when MSFT reports on Wednesday with commercial cloud growth estimated at 44.8% y/y... We remain Overweight on MSFT as a top cloud stock to own for 2019, based on a strong balance sheet with $50B+ in net cash, improving margins, and double-digit growth prospects driven by a cloud franchise that could triple to $100B by CY23E."