It will be a packed week of tech earnings releases in the US, but the software giant Microsoft Corp could draw special attention when it will report its first quarterly results for the new 2022 fiscal year after the closing bell on Tuesday. Despite some softness during the previous month, the company’s stock was one of the few in the industry to quickly sail back into uncharted territory, comfortably outpacing its peers across the board. Forecasts suggest earnings’ growth could return to pre-pandemic levels, while Microsoft's diversification strategy will probably keep feeding the bulls. The consensus recommendation from Refinitiv I/B/E/S analysts is “buy”. 

Microsoft stock outperforms big rivals

A surge in global bond yields in September forced Microsoft’s stock to change course to the downside, but the damage was negligible, proving to be a regular part of an uptrend and an opportunity to buy the dip near the backstop of the 20-weekly simple moving average (SMA).

However, while most tech stocks that also suffered a correction have managed to rebound somewhat, Microsoft is the only one that has since climbed to new all time-highs.

Google parent Alphabet, Amazon, and Apple, for example, are still some distance below their July record highs at a time when Microsoft is printing record after record in the $300 zone. Excluding Google, Microsoft is also outpacing the broader markets, growing by almost 40% year-to-date compared to the S&P 500’s average of 21% and Nasdaq’s 19%.

Q1 2022 earnings estimates

Having successfully completed its 2021 fiscal year, with revenues and profits beating expectations for the tenth consecutive quarter in the last three months to July, the company could start its new business calendar at a slower gear compared to the Q4 impressive numbers. A quarterly falloff in Q1, however, has been a usual phenomenon for a while, therefore yearly comparisons will probably get more press once again, especially as the 2020 base effects move out of the equation. However, chip shortages continue to weigh on the tech outlook.

On that front, investors project the double-digit expansion to continue but staggeringly near low-bar levels. In particular, revenues are expected to ease to $43.9bln, marking a growth of 18.2% y/y from 21.3% previously – the weakest growth since Q2 2020. Earnings per share (EPS) could face their steepest stagnation in more than three years at $2.07, printing a ‘sluggish’ expansion of 13.95% versus 48.6% and 45.0% registered respectively in the past two quarters.

Profitability could dry as well, with net income rising at a much softer pace of 12.9% to $15.6bln and gross profit margin turning negative for the first time since Q1 2018.

Despite the growing pessimism in previous months, last week’s earnings releases managed to gap above the forecasts and boost market sentiment, downplaying the consequences from the global supply crunches, labor shortages, and rising inflation pressures. Hence, unless Microsoft’s results follow a similar pattern, a miss in the data could trigger some profit taking, likely bringing the $305 restrictive area back under the spotlight, while a more aggressive decline could re-challenge the $290 - $295 area, where the crucial 20-weekly SMA is currently placed.

Business diversification 

Any potential decline in the stock, however, could only be short-lived, or at least not threatening for the stock’s upward trajectory, and there is a good reason to justify this narrative as cloud-based services seem to have become permanently integrated in the business world.

Some analysts believe that Microsoft’s top-revenue Azure cloud computing services will never become as huge as Amazon’s Web Services, but the company’s ability to engage in heavy mergers and acquisitions helps it to secure durable demand not only for its intelligent cloud segment but also for its popular Office 365 offerings through its well-known diversified business model. Despite its mounting legal antitrust battles, Microsoft came close to reporting a record number of acquisitions in the three months to September, including its second largest acquisition of the artificial intelligence software Nuance Communications at $19.7bln.

Cybersecurity is another emerging industry. During a high-profile closed-door meeting with President Biden and other top tech executives in late August, Microsoft pledged to invest $20bln in the next five years to incorporate security settings into its products.

The company is also making new efforts to provide a crisp experience to its world-leading Xbox gaming console users, enabling new brand design features this month, while speaking about updates, new important capabilities of Teams will be delivered along with the new Windows 11 version, which was released on October 5. Although the installation is free, rising subscriptions are expected to enhance Microsoft’s dynamics in the software industry.

Competition

Of course, ongoing chip shortages and the slowing PC market could make competition against Amazon and Google, which are present in almost all its segments, a tough game in a hybrid work environment. Still, Microsoft’s transition to the cloud and mobile focus and its diversified business model could bear fruit in a longer-term period.

Besides, a more than 10% price increase in its popular Office 365, which is the first price update since the software was launched a decade ago, as well as its regular dividend payments to shareholders in the fourth quarter suggest the company is moving at a healthy pace.

Note that valuation metrics are also favorable for Microsoft at the moment, with its stock trading 33.3x forward 12-month earnings compared to the 52.47x average in the software industry. Hence, traders may not become very sensitive to any negative earnings surprises. Alternatively, an upbeat report could open the door for the $320.0 level, being the 161.8% Fibonacci extension of the latest downfall.