Earnings preview: Microsoft

• Microsoft to release earnings after close of US session today

• Another quarter of double-digit growth expected

• Sales growth expected to slow to below 20% for the first time in a year

• Intelligent Cloud segment continues to lead

• Stock trades 17% year-to-date lower

Microsoft (MSFT.US) is set to report earnings for fiscal-Q3 2022 (calendar Q1 2022) after the close of the Wall Street session today. Along with Alphabet (GOOGL.US), Microsoft will be the first of US mega techs to report earnings and may have a big impact on sentiment towards the tech sector. Let's take a quick look at what the market expects from the release and what to focus on.

Another double-digit sales growth expected

Analysts' expectations for Microsoft earnings in calendar Q1 2022 show that the company is still seen to be in good shape. Revenue is expected to jump to $49.04 billion, marking an 18% YoY jump. The Intelligent Cloud segment is expected to be the top contributor with $18.9 billion in sales as the company continues to focus on cloud business. EPS is expected to improve from $1.95 in Q1 2021 to $2.19 in Q1 2022 with net income jumping 22% YoY to $16.5 billion.

Market Expectations

• Revenue: $49.04 billion (+18% YoY)

• Productivity and Business Processes: $15.78 billion

• Intelligent Cloud: $18.9 billion

• More Personal Computing: $14.33 billion

• EPS: $2.19

• Net Income: $16.5 billion

• Operating income: $20.04 billion

• CapEx: $5.73 billion

• Gross margin: 68.2%

What to focus on?

As Microsoft has a good track record of beating market expectations, it looks like the company may be set to report another quarter of solid growth. However, a point to note is that if expectations are confirmed, Microsoft would report sales growth that is lower than 20% for the first time in a year. As such, attention will be paid to future outlook.

While the Intelligent Cloud segment is holding firm and is expected to continue doing so, things do not look as rosy in the company's other segments. The More Personal Computing segment is expected to struggle further as high inflation is limiting customers' willingness to spend on new electronics. Also the Productivity and Business Processes segment is expected to see some weakness as corporate clients continue to drop services like Microsoft Office in favor of cloud-based services. Last but not least, it is expected that the company will make some mention of Russia. More precisely, on how much the decision to halt new product sales in the country has impacted overall business outlook. 

A look at the chart

Taking a look at Microsoft chart (MSFT.US) at D1 interval, we can see that the stock has been trading mostly sideways this year. While stock is trading 17% year-to-date lower following early year drop, range of moves in 2022 so far has been largely limited to a $275-315 trading range. Stock dropped to the lower limit of the range by the end of the previous week but bulls managed to defend the support zone at the beginning of this week. From a technical point of view, this is a good spot to launch a recovery move towards the upper limit of the range in the $315 area. $305 resistance zone marked with a 200-session moving average (purple line) may offer some resistance on the way there. However, earnings release after the close of today's Wall Street session may invalidate any technical setup we are observing currently therefore it may be wise to wait with pure-technical trades until after the impact of Q1 earnings release is known.

Source: xStation5