Earnings season is upon us again, and once the market action comes to a close next Tuesday (January 24), Microsoft (NASDAQ:MSFT) will step up to deliver its second quarter of fiscal 2023 report (December quarter).
Ahead of the print and breaking with tradition, Goldman Sachs analyst Kash Rangan thinks the latest report comes at a time of shifting sentiment, believing the stock’s “go-forward performance is predicated on earnings durability rather than revenue growth.”
To account for a “reversal of the growth curve seen in recent years,” Rangan has lowered the growth estimates for Azure, the tech giant’s cloud computing platform. Rangan now anticipates Azure growth of 29%/22% in FY23/FY24, respectively, down from 31%/30% beforehand. “While we are trimming our Azure estimates as a result of the unpredictable nature of the consumption model,” the analyst went on to add optimistically, “the strength of Commercial RPO (+30%) may lead to re-acceleration once recession concerns ease.”
Rangan has also made some changes to his model for overall revenue growth and is now calling for a 9% rise in FY24 compared to 12% beforehand. However, with the growth anticipated to “trough” to ~3% in F2Q23 (from F1Q22’s +22%), Rangan does think the “meaningful top-line slowdown” is already factored into the stock’s performance (down 21% over the past 12 months).
The good news is that on the earnings front, Rangan expects to see “relative resilience,” calling for a 3% uptick in FY23 – the same as before – and +16% in FY24 – down a touch from 18% beforehand. This compares well to previous “downcycles” where EPS showed a year-over-year drop – for instance, the 14% decline in FY09.
All told, for F2Q23, Rangan expects revenue to rise by 3% YoY to $53.1 billion – roughly the same as consensus – and EPS to fall by 6% YoY to $2.34 (Street has $2.33). For FY23, Rangan has revenue at $210.4 billion (a 6% YoY increase) and EPS at $9.53 (+3% YoY) vs. consensus expectations of $212.3 billion and $9.58, respectively.
Down to business, what does this all mean for investors? Rangan rates MSFT shares a Buy, backed by a $315 price target. The figure implies the shares will climb 32% higher over the one-year timeframe. (To watch Rangan’s track record, click here)
Most analysts agree with Rangan’s take; the stock claims a Strong Buy consensus rating, based on 26 Buys vs. 2 Hold and 1 Sell. At $283.58, the average price target makes room for 12-month gains of ~20%. (See Microsoft stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
