Earnings Preview: Microsoft To Report Tomorrow, Cloud Divisions In Focus

Software and computing giant Microsoft reports earnings after market close on Wednesday, Oct. 24. Here’s a look at what might be expected from its quarterly results.

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When it comes to cloud computing, the tech giants have been battling it out for some time. On the back of IBM’s (IBM) earnings, which included some new cloud deals, investors might be interested to see whether or not that’s impacted Microsoft (MSFT) in any way.  

Investors will get a look at the latest results when MSFT reports fiscal first-quarter earnings after market close on Wednesday, Oct. 24. 

For the quarter, MSFT is expected to report adjusted EPS of $0.96, up from $0.84 in the prior-year quarter, on revenue of $27.9 billion, according to third-party consensus analyst estimates. Revenue is projected to increase 13.7% year over year. MSFT has had a long streak of beating analyst’s expectations, with revenue beating estimates in 19 out of the last 20 quarters. 

While several of MSFT’s divisions have reportedly been growing at a double-digit pace, the company’s cloud services divisions have been the major driver of revenue growth. When it last reported, revenue in the intelligent cloud division grew 23% year over year to $9.6 billion. Azure, the company’s cloud computing platform, grew 89% year over year, the fastest out of all of its products and services.

Beyond the company’s cloud division, there are quite a few other areas that analysts have been focused on: LinkedIn, gaming and the Surface. The gaming division has maintained double-digit revenue growth for some time and was up  39% to $643 million in its last report.  

LinkedIn, which MSFT shelled out $26.2 billion for, is one of management’s strategic focuses this year, so they might provide some additional detail on the earnings call about how they plan to continue to grow that business. In the last report, LinkedIn revenue was up 37% year over year to $397 million. 

And finally, the Surface has been a bigger focus for analysts after the new models were rolled out. Sales in this division had been stagnant, but they were up 25% year over year to $237 million, which management attributed to “strong performance of the latest editions.” Buzz from new products can sometimes wear out over time, so analysts are likely to be looking to see if that stronger growth can be maintained.

2018 Rally. MSFT has continued to outperform in 2018 and is up 27.55% year to date, beating the S&P 500 (SPX ) by a wide margin. Along with the broader benchmarks, the stock is pulling back in trading today and remains a little ways from its all-time high of $116.18. Chart source: thinkorswim® by TD Ameritrade. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Microsoft Options Trading Activity

Options traders have priced in a 5.5% stock move in either direction around MSFT’s upcoming earnings release, according to the Market Maker Move indicator on the thinkorswim® platform. Implied volatility was at the 80th percentile at yesterday’s close, but not too long after today’s open it had spiked to and was bouncing around the 97th and 98th percentile. 

In short-term trading at the Oct. 26 weekly expiration, calls have been active at the 110 and 112 strike prices, while trading on the put side has been concentrated at the 110 strike. 

There hasn’t been much activity at the next several weekly expirations. At the Nov. 2 weekly expiration, however, the 111-strike call has been heavily traded relative to the rest of the strikes at that expiration. 

Looking at the Nov. 16 monthly expiration, the 110 and 115 strikes on the call side have been heavily traded, while activity on the put side has been concentrated at the 105 and 110 strikes. 

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

Good Trading,

JJ

@TDAJJKinahan

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