What to Expect from Microsoft's Earnings: Robust Figures Despite High Valuation

In FY2023 Q4, Microsoft exceeded market expectations by posting earnings per share of $2.69 alongside revenue of $56.19 billion, which represents a 20% and 8% increase from the previous year, respectively.

Analysts widely anticipate that Microsoft's upcoming financial results will demonstrate a sustained revival in both its revenue and profits, consistent with the trend observed over the previous two quarters. The prevailing expectation is for Microsoft's revenue in FY2024 Q1 to grow by 8.82% compared to the previous year, reaching $54.54 billion.

Likewise, there is an expectation for a 12.64% year-on-year increase in Microsoft's earnings per share (EPS) for the upcoming financial results to reach $2.65, which marks a substantial rise from the $2.35 posted in FY2023 Q1.

Over the last five quarters, Microsoft's Intelligent Cloud segment has been encountering a deceleration in year-on-year growth. Despite being the most prominent division and accounting for 43% of the total revenue, this slowdown is cause for concern. However, analysts anticipate a return to more robust growth for this segment in the upcoming FY2024 Q1 results, with Bloomberg estimating growth at 16.15%.

Since committing a $10 billion investment to ChatGPT, Microsoft has successfully advanced its AI development in the Azure cloud business. As of early March, the company had made ChatGPT available in preview on Azure OpenAI Service, and over the last six months, it has expanded its service for wider applications and regions. A significant breakthrough was the introduction of Microsoft 365 Copilot—an AI supplement for core software such as Word and Excel. Bloomberg reports that for the upcoming FY2024 Q1 results, Azure has experienced a year-on-year growth of 27.14% in the June quarter.

Conversely, Microsoft's recovery in the Personal Computing business could be impeded by weak consumer demand for personal computers (PCs). Analysts predict that this segment will experience a year-on-year decline for the fourth consecutive quarter.

Microsoft has recently finalized its acquisition of Activision Blizzard for $69 billion, marking the most significant deal in the industry to date. This acquisition may serve to solidify Microsoft's leading market share in the gaming industry as it gains control of popular titles such as Call of Duty, World of Warcraft, and Candy Crush.

For the fiscal first quarter, Microsoft expects revenue growth in the Productivity and Business Processes segment of 11.1% to a range of $18.3 billion, according to Bloomberg.

The momentum observed for Teams, Microsoft's workspace communication solution, could have served as a positive factor in the upcoming financial report. Teams' growing customer base and feature advancements have enabled Microsoft to gain market share in enterprise communication against rivals like Zoom. The hybrid/flexible work model is expected to have fueled Teams' user growth.

As of October 20, 2023, Microsoft's PE ratio is at 33.75, which is the third-highest level in the past three years, behind only 35.24 in December 2021 and 35.11 in June 2023. It won't be surprised if the stock sells off after reporting good earnings because at this valuation level, the market is likely expecting significant surprises.