Microsoft Braces for Earnings Report Amid Robust Growth Expectations

Microsoft (MSFT) is reporting its first-quarter fiscal 2025 results on October 30.

The Zacks Consensus Estimate anticipates revenues of $64.41 billion, reflecting a 14% increase compared to the same quarter last year.

Meanwhile, the consensus estimate for earnings has been adjusted down by a penny to $3.08 per share, indicating a 3% year-over-year growth.

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Find the latest earnings estimates and surprises on Zacks Earnings Calendar.

Examining Earnings Surprise History

In its most recent quarter, Microsoft delivered an earnings surprise of 1.72%. Over the last four quarters, the company has consistently beaten the Zacks Consensus Estimate, achieving an average earnings surprise of 6.34%.

Microsoft’s Price and Earnings Surprise Analysis

Microsoft Corporation price-eps-surprise | Microsoft Corporation Quote

Earnings Whispers

The current model does not guarantee an earnings beat for Microsoft this quarter. A favorable Earnings ESP coupled with a Zacks Rank of #1 (Strong Buy), #2 (Buy), or #3 (Hold) typically suggests a higher chance of an earnings beat, which is not the case this time. At present, Microsoft holds an Earnings ESP of -0.74% and a Zacks Rank #3.

Key Factors Influencing Upcoming Results

The upcoming first quarter results are expected to showcase strong performance, primarily bolstered by the Intelligent Cloud and Productivity and Business Processes segments. The company’s emphasis on cloud services, especially Azure and the Office 365 suite, is projected to significantly enhance revenue growth.

In the Intelligent Cloud segment, Microsoft expects revenues between $28.6 billion and $28.9 billion. Our estimate stands at $28.69 billion, representing an 18.3% increase from the same period last year. Furthermore, Azure is forecasted to experience growth ranging from 28% to 29% at constant currency, serving as a cornerstone of Microsoft’s AI-driven strategy.

Another integral aspect of Microsoft’s growth is Teams, its communication platform for businesses, which continues to broaden its user base and features, effectively going head-to-head with competitors such as Zoom, particularly in the age of hybrid work arrangements.

The Productivity and Business Processes segment is expected to generate revenues between $20.3 billion and $20.6 billion, with our estimate around $20.34 billion, indicating a 9.4% year-over-year rise. This is driven by solid performance across various product lines, though traditional Office products are seeing a decline as the market shifts towards cloud solutions.

As for the company’s More Personal Computing segment, Microsoft projects revenues between $14.9 billion and $15.3 billion.

Despite slow personal computer demand, revenues from Windows are somewhat supported by gradual traction in commercial products and cloud services. According to the International Data Corporation’s preliminary results for Q3 2024, global PC shipments totaled 68.8 million units, marking a 2.4% decline from last year. Factors such as increased costs and inventory adjustments contributed to a slower sales cycle.

In the gaming sector, Microsoft anticipates revenue growth in the low to mid-30% range, significantly aided by the acquisition of Activision. Xbox content and services revenue is projected to grow by low to mid-50%.

Evaluating Price Performance and Valuation

Year-to-date, shares of MSFT have increased by 12.9%, underperforming compared to the broader Zacks Computer & Technology sector, which has grown by 25.3%. Competing firms like DELL, HPE, and AAPL have witnessed gains of 57.6%, 14.3%, and 19.8%, respectively.

MSFT’s Valuation Compared to Sector and Peers

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Looking at valuation metrics, Microsoft’s forward 12-month price-to-sales (P/S) ratio is 10.91X, significantly surpassing the Zacks Computer – Software industry average of 7.71X and the median of 10.17X, indicating a stretched valuation.

MSFT’s Elevated P/S Ratio Signals Potential Caution

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Final Thoughts on Investment Potential

Microsoft stands out as a strong investment opportunity due to its leading position in cloud computing (Azure) and productivity software (Office 365), which together fuel sustained revenue expansion. The company’s commitment to integrating AI into its services also adds to its competitive edge.