Microsoft earnings: Trillion-dollar valuation is banking on continuing cloud growth

Growth of Microsoft Corp.’s cloud service Azure will be key in determining whether the software giant maintains its leading trillion-dollar market cap after its earnings report.

Microsoft MSFT, -1.31% is scheduled to report fiscal fourth-quarter earnings after the bell on July 18. Shares closed are up 37% year to date, compared with the 33% gain in the iShares Expanded Tech-Software Sector ETF IGV, -1.16% In comparison, the S&P 500 index SPX, -0.34% is up 20% for the year.


With Azure revenue rising 73% in the last quarter from year ago levels, and shaping up as the company’s fastest-growing segment, investors are concerned whether that pace can be sustained and whether Microsoft can continue to chip away at Inc.’s AMZN, -0.55% dominance in the public cloud market.

Evercore ISI analyst Kirk Materne, who considers Microsoft a “best-in-class” stock with a price target of $165, said investors may need to be patient in the near-term with the stock given its run-up, but sees a good long-term risk/reward for it, especially given the good first half for software companies.

“As we head into 2H, our general view is that while the long-term demand drivers for the group remain intact, investors will need some patience as stocks digest 1H gains,” Materne said. “In fact, when looking at the performance of software companies on a 1H vs. 2H basis over the last 10 years, strong 1H performance is usually followed by a slower 2H (not exactly a shock).”



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