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Is the Microsoft share price about to hit the roof?

The appreciation in the Microsoft [MSFT] share price so far in 2021 reflects its growing cloud ambitions. Will the company’s fourth quarter of 2021 earnings help to push the stock sky-high?

The Microsoft share price is up 30.8% in the year-to-date, hitting a record close of $289.67 on 23 July. The Microsoft share price is up 44.4% in the last 52 weeks.

Growth in the Microsoft share price so far this year has been relatively steady despite slight pullbacks in March and May. The stock has outpaced the broader Nasdaq 100 Technology Sector index, which is up 16% year-to-date but trails rival cloud giant Alphabet’s [GOOGL] 51.8% increase. The Microsoft share price’s gain is nearly on a par with Facebook [FB], which is up 35.3%. 

30.8%

Microsoft's YTD share price rise

  

In June, the company’s market cap closed above $2tn for the first time. The rise in the Microsoft share price has been attributed to continued demand for cloud products and services and collaboration tools and software, including Azure and Teams. 

 

Microsoft share price set to benefit from Teams effort

On the third quarter of 2021 earnings call on 27 April, Microsoft revealed Teams now had 145 million daily active users (DAUs), an increase of 30 million since it last disclosed numbers in October 2020. Just before the coronavirus pandemic started, Teams had 32 million users. 

Although Microsoft doesn’t break out its Teams revenue, the company’s Productivity and Business Processes segment brought in $13.55bn in the three months to the end of March, an increase of 15% from the year-ago quarter.

The Intelligent Cloud segment rose by 23% to $15.12bn, while the More Personal Computing segment was up 19% to $13.04bn.

Total revenue for the third quarter of 2021 was $41.71bn, marginally beating the Refinitiv analyst expectation of $41.03bn. It was up 19% from the $35bn reported in the third quarter of 2020, making it the best-performing quarter for revenue growth since the first quarter of 2019. Earnings per share were $1.95 versus $1.78, as expected by analysts. 

$41.71billion

Microsoft's total revenue for Q3 2021 - a 19% YoY rise

  

As for the fourth quarter of 2021, revenue is expected to be between $43.6bn and $44.5bn, up from $38bn in the year-ago period, said Amy Hood, CFO of Microsoft, on the company’s most recent earnings call. The Productivity and Business Processes segment is expected to bring in between $13.8bn and $14.05bn; Intelligent Cloud $16.2bn to $16.45bn; and More Personal Computing between $13.6bn and $14bn.

According to Zacks Equity Research data, the analyst consensus is in the middle of the range at $44.07bn. This would represent a 15.9% year-over-year increase. Earnings per share are estimated to grow by 30.1% to $1.90, up from $1.46 reported in the fourth quarter of 2020. 

 

Azure set to lead gains

As noted by Satya Nadella (pictured), CEO of Microsoft, during its third-quarter earnings call: “Over a year into the pandemic, digital adoption curves aren’t slowing down. In fact, they’re accelerating, and it’s just the beginning.”

The company is confident that Azure revenue will continue to shine — its sales were up 50% in the third quarter, although flat sequentially. Large long-term Azure contracts should reflect continued healthy growth in commercial bookings in the three months to the end of June.

In a bid to capitalise on its ever-dominant cloud position, Microsoft has announced Cloud PC. From 2 August, users can run their Windows PC experience on any Windows device using the Azure cloud service. Cloud PC will no doubt help drive an increase in Azure subscriptions. 

“Over a year into the pandemic, digital adoption curves aren’t slowing down. In fact, they’re accelerating, and it’s just the beginning” - Satya Nadella, CEO of Microsoft

 

Brent Thill, an analyst at Jefferies, has claimed Cloud PC could be the “next killer platform.” In a note to clients seen by Barron’s, he said the desktop-as-a-service offering should appeal to small- and medium-sized businesses first and foremost.

“Microsoft is moving into fiscal 2022 looking for the next leg of growth from new product initiatives including a more integrated Teams and Windows 11,” added Thill, who recently raised his target for the Microsoft share price from $290 to $310. 

The Microsoft share price could have plenty of upside from its 23 July closing price of $289.67, amid signs of an acceleration in corporate IT spending.

Technology Select Sector SPDR [XLK] has allocated the Microsoft share price a 20.37% weighting, and the fund has a daily total return of 17.96% year-to-date. The iShares US Technology ETF [IYW] has allocated 16.95% and has returned 20.4% year to date. 

Disclaimer Past performance is not a reliable indicator of future results.

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