Microsoft Corp MSFT is one of those few technology bellwethers that have consistently reported positive earnings beat in the trailing twelve months. We note that the company has beaten the Zacks Consensus Estimate in three of the preceding four quarters, with an average positive surprise of 8.55%.
Earnings growth has also been impressive over this period. In the last quarter (second-quarter fiscal 2017), Microsoft reported earnings of 83 cents per share, which increased 9.2% on both year-over-year and sequential basis.
Microsoft Unlikely to Beat in Q3
However, we will prefer to avoid Microsoft this earnings season due to the unfavorable combination of a Zacks Rank #4 (Sell) and an Earnings ESP of -1.45%. Earnings ESP is the difference between Most Accurate Estimate and the Zacks Consensus Estimate.
As per our proven model a stock is likely to post an earnings beat when it has a favorable combination of positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Conversely, we caution against stocks with a Zacks Rank #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
We also note that Microsoft shares have underperformed the Zacks Computer Software industry on a year-to-date basis. The stock returned 5.4%, while the industry gained 9.7%. The underperformance can be attributed to slowing Azure cloud services revenue growth, increasing competition and sluggish IT spending environment.
Slowing Azure Growth a Concern
Microsoft targets $20 billion cloud revenue in fiscal 2018. However, slowing Azure revenue growth is a concern. In the last quarter, Azure revenues grew 95% at constant currency, slower than 121% growth reported in the previous quarter and 140% in the second-quarter fiscal 2016. (Read More: Amazon & Microsoft: Are These Cloud Computing Leaders in a Growth Slowdown?)
Amazon AMZN continues to dominate the cloud computing market with Amazon Web Services (AWS) trailed by Microsoft Azure. However, we believe that increasing competition from the likes of Alphabet GOOGL, IBM, salesforce.com CRM and Oracle ORCL will hurt Microsoft’s market share going ahead.
Moreover, sluggish IT spending is a major headwind for Microsoft. Gartner in its latest report projects IT spending to increase 1.4% over 2016 to $3.5 trillion in 2017. The figure is much lower than earlier projection of 2.7% growth.
Although estimated improvement in data center spending is good for Microsoft, slowing spending on enterprise software is a concern for Windows, Office 365 and related applications.
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