Analysts are confident that Microsoft (MSFT) is in for a rebound on earnings after a rough October.
The month ahead of Microsoft's earnings release on Oct. 24 has not been ideal, as the stock was battered by October's selloffs in technology shares. MSFT stock has fallen from its heights of over $116 early in the month to below $105 during last week's tech tumble.
However, the pullback may just present a buying opportunity as analysts eye a surge on earnings that could help the company close in on Amazon (AMZN) in the market-cap pecking order.
As the company has beaten analysts estimates on 19 of its last 20 earnings releases, betting on CEO Satya Nadella ahead of earnings is a safer bet than most.
Microsoft Outlook
The outlook for Microsoft heading into its earnings release has analysts excited about a bounce.
"Our positive thesis remains that Microsoft can return to sustainably delivering mid-teens EPS and FCF growth as the headwinds from a declining PC market in recent years and the transition to the cloud continue to abate," Wells Fargo analyst Phil Winslow wrote in his outlook ahead of the September-quarter results.
He reiterated his firm's $130 price target and an "outperform" rating as he expects the company to display these positive factors come the 24th.
Credit Suisse analyst Brad Zelnick said that the company's growth engines, including the aforementioned cloud business and the Microsoft 365 products as specific factors he took away from its recent proxy release and are things to watch come the earnings release.
"Microsoft 365 is now a multi-billion-dollar business, Commercial Cloud annualized revenue at $29 billion is ahead of its internal $20 billion target set in 2016," he wrote on Tuesday.
The cloud segment, Azure, has been highlighted by Microsoft in recent years as a major area of focus for the company and was noted extensively on its most recent earnings call.
"We will continue to increase our investments in CapEx to meet the growing demand for our cloud services," CFO Amy Hood said in July.
Credit Suisse's metrics indicate the bet on the secular growth story of cloud computing has been a profitable one, to the tune of $9 billion of outperformance on company guidelines.
To be sure, Zelnick noted that the company's Edge internet browsing service and Bing search engine are "areas that still require work."
Given the metrics of growth across the largest business segments, he downplayed these minor issues and maintained a $125 price target and an "outperform" rating for the stock as it cruises toward earnings.
Good Governance
Microsoft executives are mourning the loss of co-founder and pioneer Paul Allen this week.
While investors will likewise mourn the loss of a pivotal part of the company at its founding, they will likely take some comfort in the strong guidance the company remains under.
Credit Suisse's Zelnick highlighted Microsoft's incentive-based payment structure as helpful to ensuring the company continues to grow and executives earn their pay.
On average, for its executive compensation disclosed in company filings, executive pay was made up of 7.6% base salary, 19.4% cash incentive, 36.5% performance stock awards, and 36.5% stock awards.
Zelnick explained that this structure is key to making sure executives reinvest in the business in order to accelerate its aforementioned growth engines.
The payment plan has not slowed executive buying of stock, however, as key personnel such as CEO Nadella double down on their belief in growth.
According to Capital Markets Laboratories, a financial technology and research firm, officers and directors have bought 1.6 million shares of company stock in the past three months. Over 100,000 shares alone were bought by Nadella on Sept. 18, according to the report.
With the shares down in early Thursday trading, the slide might prompt traders to follow Nadella's suit in buying ahead of the earnings.
