Is the Street Too “Aggressive” on Microsoft (MSFT) Intelligent Cloud Expectations? Top Analyst Weighs In

RBC Capital's Ross MacMillan continues to be impressed with Azure demand as he previews MSFT's fiscal earnings out tonight.

Will Microsoft Corporation’ (NASDAQ:MSFT) Azure cloud-computing segment continue to knock its performance out of the park come this evening’s first quarter showcase? After all, growth here has been impressing quarter after quarter for Micron, and top analyst Ross MacMillan at RBC Capital joins the earnings conversation continuing to see strength here for the software giant.

Ahead of the print tonight, the analyst is out with a bullish earnings preview, maintaining an Outperform rating on MSFT stock with a $105 price target, which implies a close to 12% upside from current levels.

For the third fiscal quarter, the analyst projects $25.7 billion in revenue from Microsoft and $0.85 in EPS against the Street’s $28.8 billion and $0.85 estimates. Is Azure poised to be a monster moneymaker for Microsoft in its latest quarterly show? MacMillan is out forecasting roughly 93% year-over-year growth here on back of “strong fundamental demand and acceleration at scale,” with around 36% year-over-year growth for Commercial O365. The analyst anticipates Server Products will take a 2% year-over-year dip for the quarter. “As Azure continues to show impressive leverage,” the analyst projects gross margins of 58% for the third fiscal quarter, a rise from his 55% estimate in the second fiscal quarter.

MacMillan is essentially matching on third fiscal quarter consensus estimates, but for the fourth fiscal quarter of 2018, the analyst stands a bit under Street-wide expectations. From MacMillan’s perspective, the Street is holding a “slightly aggressive” bar of expectations for Intelligent Cloud. The analyst asserts, “Overall we think momentum in Azure, O365, CC GMs, and opex control are key, and we think revenue/operating income estimates for FY19/20 seem very achievable.”

In a nutshell, “We remain positive on MSFT’s earnings as Azure and Office 365 continue to grow within the mix and as commercial cloud gross margins expand. We see potential for upside from Azure growth, Commercial Cloud GMs, and Windows vs. our assumptions. We model revenue declines in Server products (given the tough comps in F3Q17) and Windows (in line with PC declines). Finally, we think operating expense growth will remain in the low-to-mid single digits organically. The biggest near-term risk we see is that we are below consensus on our Intelligent Cloud revenue forecasts for F4Q18 and as a result we are slightly below consensus for F4Q18E revenue and EPS. While we are modestly below consensus for FY19E and FY20E EPS, we note that this is due to items below the operating line,” MacMillan contends, keeping an eye on more investment into the Intelligent Edge and Internet of Things (IoT) throughout the next four years.

Ross MacMillan has a very good TipRanks score with a high 83% success rate and one of the most stellar rankings on Wall Street: #6 out of 4,774 analysts. MacMillan garners 28.0% in his yearly returns. When recommending MSFT, MacMillan realizes 23.3% in average profits on the stock.

TipRanks suggests the tech stock has magnetized a strong bullish base on the Street. Analysts are rooting for Micron’s success, with 18 out of 20 analysts polled in the last 3 months rating a Buy on the stock, just 1 maintaining a Hold, and 1 issuing a Sell on the stock. The 12-month average price target stands at $107.47, marking a healthy upside potential of 16% from where the stock is currently trading.

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