Wednesday, 1 February 2023
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Microsoft is set to report earnings after the bell. Here’s what Wall Street expects

Microsoft Stock: Earnings Resilience at a Reasonable Price — Goldman Sachs Says 'Buy'

It’s that time again and when today’ market action comes to a close, Microsoft (NASDAQ:MSFT) will announce results for the second quarter of fiscal 2023 (December quarter).

Given the recently announced 5% cull to the workforce and CEO Satya Nadella’s comments regarding a “challenging” two years ahead for tech spending, Deutsche Bank’s Brad Zelnick says it seems “clear that the company has seen incremental weakening of demand.”

Therefore, due to the more cautious outlook, Zelnick thinks there is risk to the previous FY23 guidance for Commercial revenue to grow ~20% year-over-year (constant currency) and total revenue to increase double-digits year-over-year.

“That said,” the 5-star analyst went on to add, “on an as reported basis these headwinds should be at least somewhat offset by favorable FX movements over the past several months, and net-net we reduce our top-line forecasts only modestly (-0.7%/-1.4% in FY23/24).”

The cost measures – such as the layoffs, lease consolidation, and HW portfolio optimization – the company is taking to safeguard profitability will also somewhat offset the impact on operating income. The layoffs might have involved a difficult decision but Zelnick believes the move “reinforces mgmt.’s commitment to profitable growth,” which he also thinks has been “well received” by investors.

Numbers-wise, Zelnick is calling for F2Q revenue of $52.6 billion, a 5% quarter-over-quarter increase and meaningfully lower than typical topline seasonality – i.e., ~9pts below the 3-year average while also ~0.5% below the midpoint of the company’s outlook. This is all despite FX pressures “easing” intra-quarter, which Zelnick believes will be beneficial to revenue growth by as much as ~50bps. On the bottom-line, Zelnick now expects adj. EPS of $2.27 as opposed to $2.29 beforehand.

Taking a step back, while Zelnick concedes that all software companies are bound to have a hard time in a “tougher IT spending environment,” he still expects Microsoft to “outperform most and emerge much stronger on the other side.”

Down to the Nitty Gritty: how does this all translate to investors? Zelnick reiterated a Buy rating on MSFT shares, whilst sticking with a $275 price target that implies potential upside of 13.5% from current levels. (To watch Zelnick’s track record, click here)

The Street’s average target is only a slightly more upbeat $282.16, set to generate returns of…

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