By Wallace Witkowski
Microsoft Corp. got caught up into a massive cybersecurity attack late last year, but the unprecedented intrusion may actually end up being a positive for the company’s bottom line.
UBS analyst Karl Keirstead, who has a buy rating and a $243 price target, said while Microsoft (NAS:MSFT) products were leveraged by hackers in the attack on SolarWinds Corp.’s (NYS:SWI) Orion IT management software because they are so commonplace, “the broader cyber-security community are not pointing fingers at Microsoft.”
Keirstead noted that the attack actually drove more customers into public cloud infrastructures like Azure, Amazon.com Inc.’s (NAS:AMZN) AWS and Alphabet Inc.’s (NAS:GOOG) (NAS:GOOGL) Google Cloud, “given a view that cloud data centers are more secure and that constantly patching/updating on-premise software like Orion presents a security risk that can be transferred to Microsoft, Amazon or Google.”
“Bottom line, we believe this cybersecurity attack could be a modest net positive for Microsoft,” Keirstead said.
Analysts expect Microsoft’s Intelligent Cloud segment, which includes the company’s Azure public cloud platform, to bring in $13.77 billion in revenue, up 16% from the year-ago period when Microsoft reports fiscal second-quarter earnings after the bell on Thursday.
Microsoft only breaks out percentage gains for Azure from the year-ago period without specifying a dollar amount. Azure gains were 59% in the first quarter of fiscal 2021, 47% for the fourth quarter of fiscal 2020, 59% in the third quarter, and 62% in last year’s second quarter.
Earnings: Of the 28 analysts surveyed by FactSet, Microsoft on average is expected to post earnings of $1.64 a share, up from the $1.61 a share expected at the beginning of the quarter and the $1.51 a share reported in the year-ago second quarter. Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, calls for earnings of $1.74 a share.
Revenue: Wall Street expects revenue of $40.23 billion from Microsoft, according to 25 analysts polled by FactSet. That’s down from the $40.48 billion forecast at the beginning of the quarter, but up from the $36.91 billion reported in the year-ago quarter. Estimize expects revenue of $40.78 billion.
Stock movement: Over the December-ending quarter, Microsoft shares rose 5.8%, compared with a 10.2% rise on the Dow Jones Industrial Average (DOW:DJIA) , which includes Microsoft as a component. Similarly, the S&P 500 index (S&P:SPX) rose 11.7%, and the tech-heavy Nasdaq Composite Index (NASDAQ:COMP) rose 15.4%.
Morgan Stanley analyst Keith Weiss, who has an overweight rating and a $260 price target, said that while investors may focus on Microsoft’s headwinds, he sees an opportunity given the stock’s lag in the software sector. While Microsoft’s stock has risen 35% in the past 12 months, the iShares Expanded Tech-Software Sector ETF (BATS:IGV) has grown 43%
“After clearing tough Q2 product cycle comps and lingering COVID impacts, strong secular positioning and an attractive multiple make MSFT a top stock of the recovery,” Weiss said. The Morgan Stanley analyst expects 41% growth in Azure in the second quarter, and 41.6% growth in fiscal 2021.
Citi Research analyst Walter Pritchard, who has a buy rating and a $272 price target, sees margin headwinds in Microsoft’s gaming business, and expects continued PC strength will make up for weakness in server and Office licensing.
“We see positive set-up around key top-line metrics for Microsoft, with likely upside to Azure growth metric and forward Azure numbers moving higher here after continued strong contract signing and consumption indications,” Pritchard said.
Mizuho analyst Gregg Moskowitz, who has a buy rating and a $255 price target, sees 48% Azure growth year-over-year.
“We contend that Azure is becoming more powerful, and that MSFT has assembled an impressive collection of cloud assets that will continue to drive strong overall growth for a company its size,” Moskowitz said.
Goldman Sachs, which initiated coverage with a buy rating and $285 target price, expects Azure to expand margins in Microsoft’s commercial cloud business as it grows in scale.
“While we believe that Azure’s existing growth rate of high 40’s is very impressive, particularly given the scale of the business, we believe that CY2H21 has the potential to see some acceleration,” the firm said. “More broadly, as workforces are likely to remain distributed to some extent for the foreseeable future, we see the potential for accelerated public cloud adoption.”
Of the 34 analysts who cover Microsoft, 31 have buy ratings and three have hold ratings, along with an average target price of $248.99, according to FactSet data.