Tailwinds might lift Microsoft (MSFT) amid tech weakness
By Robert Davis
19:16, 24 January 2022
American software behemoth Microsoft (MSFT) will report its second quarter earnings for fiscal year 2022 on Thursday amid ongoing weakness in the technology sector.
Some analysts are concerned about the company’s reported cash flow after it acquired Activision Blizzard (ATVI) last week as Microsoft expands its gaming portfolio and metaverse capabilities.
However, others say the company’s underlying growth strategy remains strong and expect tailwinds to catch the stock in early 2022.
Since the company last reported earnings on 26 October, the stock has lost more than 8% in value. For comparison, the broader Nasdaq 100 has fallen by 11%.
Microsoft was trading at $284.80 per share by 18:30 UTC on Monday, representing a drop of 3.3% on the day.
Microsoft purchased Activision Blizzard for just under $69bn (£51.22bn) in an all-cash transaction last week, a move many analysts applauded.
The merger made Microsoft the world’s third largest video game retailer behind Tencent and Sony. It also dramatically increased Microsoft’s video game portfolio with popular titles such as Call of Duty, Crash Bandicoot, and the Tony Hawk Pro Skater series.
But analyst Keith Bachman at the Bank of Montreal said in a recent note the deal could be bad news for the company’s short term cash flow, a number that is important to many tech investors.
The company’s inhibited cash flow could also prevent it from pursuing other mergers “at least for a period of time,” Bachman said.
Bachman added his reservations about the deal stem from its potential to create “inorganic investing in other areas besides gaming.”
Bachman maintains his rating of “outperform” and set a price target of $360 per share, implying an upside of more than 20% from Monday’s price.
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To Wedbush analyst Daniel Ives, Microsoft’s underlying growth strategy and focus on cloud computing should propel the company forward despite the cash flow concerns expressed by Bachman and other analysts.
Specifically, Ives points to revenue growth in both of Microsoft’s Office 365 suite and its Azure products as reasons why investors should see the upcoming earnings report with some optimism.
Last quarter, the company reported revenue for Azure increased by 35% while its Office 365 products brought in 23% more revenue than a year prior, according to the company’s earnings report.
This time around, Ives expects these figures to increase to approximately 50% as the company has only penetrated approximately 35% of its overall cloud market.
Ives maintained his “outperform” rating and set a price target of $375 per share, implying an upside of nearly 25% from its price on Monday.