Tech Giants Microsoft and SAP Report Strong Q2 Earnings, Driven by Cloud Growth

Should You Buy, Sell or Hold Microsoft (MSFT) Before Q4 Earnings?

Microsoft MSFT is set to report fourth-quarter fiscal 2024 results on Jul 30. The Zacks Consensus Estimate for revenues is pegged at $64.13 billion, indicating growth of 14.2% from the figure reported in the year-ago quarter. The consensus mark for earnings has remained steady at $2.90 per share over the past 30 days, suggesting 7.8% year-over-year growth. Image Source: Zacks Investment Research In the last reported quarter, the company delivered an earnings surprise of 5.91%. The company's earnings beat the Zacks Consensus Estimate in the trailing four quarters, the average surprise being 7.38%. Microsoft Corporation Price and EPS Surprise Microsoft Corporation price-eps-surprise | Microsoft Corporation Quote Earnings Whispers Our proven model does not conclusively predict an earnings beat for Microsoft this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. This is not the case here. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter. MSFT has an Earnings ESP of 0.00% and a Zacks Rank #3 at present. You can see the complete list of today's Zacks #1 Rank stocks here. Factors Shaping Upcoming Results Microsoft's performance in the fourth quarter of 2024 is expected to have shown robust growth, primarily driven by its Intelligent Cloud and Productivity and Business Processes segments. The company's strategic focus on cloud services, particularly Azure and the Office 365 suite, is likely to have contributed significantly to top-line growth. In the Intelligent Cloud segment, the company anticipates revenues between $28.4 billion and $28.7 billion. Our model estimate for this segment is pegged at $28.54 billion, indicating growth of 19% from the figure reported in the year-ago quarter. In Azure, Microsoft expects revenue growth in the range of 30-31% at cc. Microsoft's Azure platform is spearheading the company's AI-driven growth strategy. A key factor in Microsoft's growth strategy has been Teams, its enterprise communication platform. Teams has been expanding its customer base and feature set, effectively competing against rivals like Zoom. The platform's growth is closely tied to the rising popularity of hybrid and flexible work models. In the quarter under review, Microsoft announced that it is set to sell Teams separately from its Office product globally. The decision comes after the company unbundled the two products in Europe to avert a possible EU antitrust fine. Microsoft anticipates its Productivity and Business Processes segment to generate revenues between $19.9 billion and $20.2 billion. Our model estimate is pegged at $20.03 billion, indicating an increase of 9.5% year over year. This growth is underpinned by strong performance across various product lines. Office 365 Commercial is expected to see revenue growth of approximately 14% at constant currency (cc), which is in line with our model estimate. However, traditional Office Commercial products are projected to experience a decline in the mid-to-high teens range, highlighting the ongoing shift from on-premise to cloud-based solutions. The company's diversified portfolio continues to show promise, with Office Consumer products and cloud services expected to achieve revenue growth in the low-to-mid single digits. LinkedIn is projected to achieve mid-to-high single-digit growth. Our model estimate for LinkedIn is pegged at revenue growth of 6.6%. Dynamics 365, Microsoft's enterprise resource planning and customer relationship management platform, is another steady performer, with the company projecting revenue growth in the low-to-mid teens. For the More Personal Computing segment, the company projects revenues between $15.2 billion and $15.6 billion. Revenues from Windows are likely to have been driven by steady traction seen in Windows Commercial products and cloud services growth amid improving personal computer (PC) demand. The Traditional PC market delivered its second quarter of growth following eight consecutive quarters of decline. According to preliminary results from the International Data Corporation (IDC) Worldwide Quarterly Personal Computing Device Tracker, worldwide shipments reached 64.9 million units in the second quarter of 2024, representing year-over-year growth of 3%. Among other major PC vendors, Lenovo (LNVGY) and Hewlett Packard (HPE) registered an increase in shipments. Lenovo's shipments increased 3.7% year over year to 14.7 million units, while HPE's shipments grew 1.8% year over year to 13.7 million units. Additionally, Apple (AAPL) registered a 20.8% year-over-year improvement in shipments, reaching 5.7 million units. Microsoft expects Windows OEM revenues to grow in the mid to low-to-mid single-digit range. In the Gaming segment, MSFT expects revenue growth in the low to mid-40s, including roughly 50 points of net impact from the Activision acquisition. Furthermore, Microsoft anticipates Xbox content and services revenue growth in the high 50s, driven by roughly 60 points of net impact from the Activision acquisition. In the quarter under review, Microsoft announced the renewal of a publishing agreement with NetEase, which will bring back Blizzard Entertainment's games like World of Warcraft to players in China. Price Performance & Valuation Shares of MSFT have returned 17.8% year to date compared with the broader Zacks Computer & Technology sector's growth of 21.5%. Shares of HPE and AAPL have gained 21.3% and 16.3%, respectively, while shares of LNVGY have declined 2.8%. Now, let's look at the value Microsoft offers investors at current levels. MSFT is trading at a premium with a forward 12-month P/S of 11.73X compared with the Zacks Computer - Software industry's 8.13X and higher than the median of 10.05X, reflecting a stretched valuation. Microsoft presents a strong investment case with its dominant position in cloud computing (Azure) and productivity software (Office 365), driving consistent revenue growth. The company's strategic focus on AI integration and partnerships, like with OpenAI, positions it at the forefront of technological innovation. Microsoft's diversified portfolio, including gaming (Xbox) and professional networking (LinkedIn), provides stability and multiple growth avenues. However, potential challenges include intense competition in the cloud market, particularly from Amazon and Google, and the cyclical nature of enterprise IT spending. Regulatory scrutiny over market dominance and data privacy concerns pose additional risks. Despite these challenges, Microsoft's strong balance sheet, consistent cash flow, and history of shareholder returns through dividends and buybacks make it an attractive option for investors seeking a balance of growth and stability in the tech sector. Final Thoughts Microsoft's strong performance in productivity and collaboration offerings is expected to drive substantial growth in the fiscal fourth quarter of 2024 despite a premium valuation and fierce competition in the cloud market. The company's strategic focus on cloud services, AI integration, and innovative product development has positioned it favorably in the competitive market. Maintaining a position in Microsoft appears prudent at present. Investors looking to buy the stock should, however, wait for a better entry point. Check Out These Stocks Before They Report Earnings (Free Report) A stock can jump +10-20% in a single day after a positive earnings surprise. What if you could get in early on those stocks? It could be the "holy grail" of stock picking for investors. Zacks' new special report is designed to do exactly that. It reveals 5 promising stocks experts predict will crush earnings estimates and skyrocket in price. Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Apple Inc. (AAPL) : Free Stock Analysis Report Microsoft Corporation (MSFT) : Free Stock Analysis Report Lenovo Group Ltd. (LNVGY) : Free Stock Analysis Report Hewlett Packard Enterprise Company (HPE) : Free Stock Analysis Report The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

SAP's Q2 Earnings & Revenues Increase Y/Y on Cloud Momentum

SAP SE SAP reported second-quarter 2024 non-IFRS earnings of €1.10 ($1.18) per share, climbing 59% from the year-ago quarter's levels. The Zacks Consensus Estimate was pegged at $1.01. Powered by resilient performance in the cloud business, SAP reported total revenues on a non-IFRS basis of €8.288 billion ($8,921.3 million), which rose 10% year over year both at nominal and constant currencies (cc) basis. The Zacks Consensus Estimate was pegged at $8,864.7 million. SAP's transformation program remains a core focus area aimed at enhancing operational scalability and embracing technological advancements. In 2024, SAP intensified its restructuring efforts, expecting total expenses of roughly €3 billion. This initiative is crucial for aligning SAP's workforce and resources with long-term business strategies. Additionally, it plans to invest substantially in Business AI capabilities, leveraging AI-driven insights to enhance customer value and operational efficiency. In the past year, shares of SAP have gained 51.4% compared with sub-industry's growth of 24.2%. Current cloud backlog -- a key indicator of go-to-market success in cloud business -- soared 28% (both at nominal and cc basis) to €14.8 billion. On a non-IFRS basis, the Cloud and software segment (86.6% of total revenues) registered revenues of €7.175 billion, up 10% year over year (both at nominal and cc basis). Cloud revenues were €4.15 billion, up 25% year over year on a non-IFRS basis (both at nominal and cc basis). The uptick resulted from notable 33% growth in Cloud ERP Suite revenue, highlighting the effectiveness of SAP's Software-as-a-Service (SaaS) and Platform-as-a-Service (PaaS) solutions. SAP's cloud business strength was prominent across India, Japan, South Korea, Germany, Brazil and Canada. It remained strong in the United States, Saudi Arabia and China. Software licenses and support revenues totaled €3.021 billion, which decreased 5% (both at nominal and cc basis) year over year. Non-IFRS software license revenues of €0.2 billion declined 28% (down 27% at cc) year over year. Services business (13.4% of total revenues) posted revenues of €1.11 billion, up 6% year over year (both at nominal and cc basis). On a non-IFRS basis, cloud revenues related to SaaS and PaaS increased 28% at cc to €4.018 billion. Cloud revenues related to Infrastructure-as-a-Service declined 27% at cc to €135 million. Rise with SAP solution was adopted by clients, including Alpargatas, Auckland Council, Blue Diamond Growers, Border States, Copenhagen Airports, ExxonMobil, Navantia, PANDORA, Porsche Informatik, Powerlink Queensland, Prairie Farms Dairy, ProRail, Prysmian, Shiseido Company, Tokio Marine & Nichido Fire Insurance, VistaPrint, Warsaw City Hall and Xerox. In the reported quarter, BMI Group Holdings, Co-op, Fiagril, Pure Storage, UBE Corporation, and Wegmans went live on SAP S/4HANA Cloud. Major global brands across various industries, including Accenture, Ambipar, Arca Continental, BASF, Buderus Guss, Carl Zeiss, DACHSER, Endress+Hauser, iHerb, Lenovo, Minor Hotels, New Look, Parle Biscuits, Refresco, U.S. Sugar, Veolia Group and Zoomlion, adopted SAP's solutions. GROW with SAP was implemented by Consolidated Hospitality Supplies, flatexDEGIRO, Fortera Corporation, La Trobe University, Stern-Wywiol Gruppe and Trade Capital Corporation to power their respective cloud ERP with innovations. In April 2024, SAP announced significant advancements in AI for supply chain solutions, aiming to redefine productivity and efficiency in manufacturing sectors. In May 2023, SAP announced a repurchase program with an aggregate volume of up to €5 billion with expiry until Dec 31, 2025. As of Jun 30, 2024, SAP repurchased 12,895,525 shares at an average price of €145.2, resulting in payouts of €1.87 billion under the program. Margin Details Non-IFRS gross profit of €6.03 billion increased 11% from the year-ago quarter's figure. Non-IFRS Cloud gross profit increased 28% year over year to €3.04 billion (up 29% at cc) Non-IFRS Cloud gross margin was 73.3%. Non-IFRS operating profit of €1.94 billion increased 33% on a year-over-year basis (up 35% at cc). The expansion was driven by healthy revenue growth along with the smooth execution of the 2024 transformation program. Cash Flow In the quarter under review, the company generated operating cash of €1.54 billion compared with €848 billion in the prior-year quarter. In the second quarter, free cash flow was €1.29 billion compared with €604 billion in the prior-year quarter. Outlook For 2024, management anticipates cloud revenues in the range of €17-€17.3 billion, suggesting an increase of 24-27% at cc on a year-over-year basis. Cloud and software revenues for the year are now expected to be between €29 billion and €29.5 billion, suggesting 8-10% growth at cc on a year-over-year basis. Management projects 2024 non-IFRS operating profit in the range of €7.6-€7.9 billion, indicating a rise of 17-21% at cc on a year-over-year basis. Free cash flow is estimated to be nearly €3.5 billion. Also, the company reaffirmed its guidance for 2025. Non-IFRS cloud gross profit is expected to be nearly €16.2 billion. Non-IFRS operating profit is anticipated to be roughly €10.2 billion, revised up from roughly €10 billion guided earlier. Free cash flow is forecasted to be €8.0 billion. The company continues to expect cloud revenues of more than €21.5 billion and total revenues of more than €37.5 billion for 2025. Arista Networks, Inc. ANET, sporting a Zacks Rank #1 (Strong Buy) at present, has a long-term earnings growth expectation of 16.1% and delivered an earnings surprise of 15.39%, on average, in the trailing four quarters. In the last reported quarter, it delivered an earnings surprise of 14.37%. The company has a software-driven, data-centric approach to help customers build their cloud architecture and enhance their cloud experience. You can see the complete list of today's Zacks #1 Rank stocks here. Arista holds a leadership position in 100-gigabit Ethernet switching share in port for the high-speed data center segment. It is increasingly gaining market traction in 200 and 400-gig high-performance switching products and remains well-positioned for healthy growth in data-driven cloud networking business with proactive platforms and predictive operations Motorola Solutions Inc. MSI provides services and solutions to government segments and public safety programs, along with large enterprises and wireless infrastructure services. Motorola carries a Zacks Rank #2 (Buy) at present. It delivered a trailing four-quarter average earnings surprise of 7.54% and has a long-term growth expectation of 9.47%. In the last reported quarter, Motorola delivered an earnings surprise of 11.51%. Silicon Motion Technology Corporation SIMO, sporting a Zacks Rank #1 at present, delivered a trailing four-quarter average earnings surprise of 4.72%. SIMO is a leading developer of microcontroller ICs for NAND flash storage devices. The semiconductor company also designs, develops and markets high-performance, low-power semiconductor solutions for original equipment manufacturers and other customers. Note: €1 = $1.07631 (period average from Apr 1, 2024, to Jun 30, 2024) Check Out These Stocks Before They Report Earnings (Free Report) A stock can jump +10-20% in a single day after a positive earnings surprise. What if you could get in early on those stocks? It could be the "holy grail" of stock picking for investors. Zacks' new special report is designed to do exactly that. It reveals 5 promising stocks experts predict will crush earnings estimates and skyrocket in price. Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report SAP SE (SAP) : Free Stock Analysis Report Motorola Solutions, Inc. (MSI) : Free Stock Analysis Report Silicon Motion Technology Corporation (SIMO) : Free Stock Analysis Report Arista Networks, Inc. (ANET) : Free Stock Analysis Report The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.