Why Microsoft Stock Is Worth Buying Before Earnings

In the National Football League, the last twenty yards before the goal line are known as the red zone. This is where some of the grittiest plays can occur. And it’s where the best teams know how to score and prove it over and over. And when you’re in the fourth quarter with the game on the line, being in this red zone is even more challenging.

Microsoft (NASDAQ:MSFT) stock has been on a tear so far this year. It has soared from $85.54 up to a high of $105.95 equating a total return so far of 24.05%. That’s 2.74 times the return of the S&P 500 and 47% better than the S&P Information Technology Index.

That’s a great score for shareholders. And for my subscribers to Profitable Investing, that’s just piling it on as they’ve scored an overall return of 355.26% in MSFT stock, which has been in the model portfolio since 2012.

But will it continue to score past the recent highs? After all, Microsoft stock is in the red zone of its trading. And at 10.19 times its book value and 7.6 times sales, the stock is highly valued right now.

But what might push MSFT stock over the top will be how the company’s fourth-quarter’s results play out on Thursday afternoon at 4:09 pm.

MSFT Stock: First & Goal

The company’s revenues are up over the past year by 5.9%. That’s not that spectacular on its own. But if you break down that overall revenue growth by segment, it tells a better story. Over the past three years, the average growth for its personal computing segment is a meager 0.27%. Productivity and Business Processes is running at 4.11%. But the real number to look at relates to Azure, MSFT’s cloud unit, which has revenue growth averaging 8.08%.

The cloud is where the company is focused on to get the score for shareholders.

The CFO, Amy Hood has $132 billion in cash to allocate. And she has not been shy to move money and resources from Windows and PCs toward the faster growth businesses like the cloud.

And she knows along with the rest of the C-Suite, that Microsoft has plenty of competition just from U.S. peers, including Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), Cisco (NASDAQ:CSCO) and others.

In the last quarter, the cloud business represented 29.4% of overall revenues compared to 37% for PC and 33.6% for Productivity.

Right now, the estimate consensus that I’m seeing on my Bloomberg Terminal is that the overall revenue number for the Microsoft is expected to come in at $29,219.2 million, which would put it up 14.12% over the same quarter for 2017. And the operating income is expected to come in at $9,542.6 million, which would equate to a gain of 19.46%. This would be good news on two fronts.

First, it would mean that revenues are significantly picking up. But more importantly, it would mean that operating margins are increasing from 31.2% to 32.7%, which means profitability should show improvement, even with the slower growth in the non-cloud units.

Right now, Bloomberg tracks 35 Wall Street analysts; 31 have buy ratings on MSFT stock, which is up from 26 analysts at the start of this year. Meanwhile, only two analysts have hold ratings on the stock (which to me, usually means sell) and two analysts have sell ratings.

And the average price target on Microsoft stock for the next 12 months is up another 7.5% versus the average analysts’ projection for the average stock in the S&P 500 Software Index at 5.5%.

Finally, I’ve seen options trading reports that indicate expectations for the MSFT stock price to pick up 3.9% after the earnings release.

I see Microsoft stock trading higher over the next few months by at least 5.7% against a more range-bound S&P 500. And with recent deals for cloud services from the likes of Walmart (NYSE:WMT) and the beleaguered General Electric (NYSE:GE) among many others, revenue and underlying business values should continue on the rise.

I’d be a buyer ahead of the earnings release and see that Microsoft has a good game plan as it starts the first quarter in great field position.

Neil George is the editor for Profitable Investing and according to company policy, he does not have a position in any of the aforementioned securities.

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