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Clouds Part: Amazon And Microsoft Cloud Businesses In Focus Ahead Of Earnings

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Clouds Part: Amazon And Microsoft Cloud Businesses In Focus Ahead Of Earnings

Two U.S. companies arguably dominate the growing cloud infrastructure, and they both report later this week even as they wrestle each other to be the second highest-valued stock by market capitalization.

We’re talking about Microsoft (NASDAQ: MSFT) and Amazon.com, Inc. (NASDAQ: AMZN), both companies that started out known for one thing (software in the case of MSFT and online books for AMZN), and have expanded their reach into other business areas over the years as they’ve grown. Now, the two are duking it out in cloud computing. 

Microsoft is scheduled to report fiscal Q3 earnings after the close Wednesday, with Amazon expected to report Q1 earnings after the close Thursday.

As a reminder, cloud computing provides a way for businesses to access servers, storage, databases and application services over the Internet. A company like AMZN or MSFT owns and maintains the network-connected hardware required for these services, while their business customers can use what they need through the web without having to build or buy expensive hardware platforms.

As the two companies’ cloud businesses grow, they’re touting partnerships and expanding their reach even to competitors in an effort to climb to the top.

For instance, earlier this year, MSFT announced a partnership with Walgreens Boots Alliance Inc. (NASDAQ: WBA) to develop new health care delivery models and for WBA to migrate most of its infrastructure into MSFT’s Azure cloud. This followed similar announcements by MSFT of deals with Kroger Co (NYSE: KR) and Walmart Inc (NYSE: WMT). The interesting thing, as research firm CFRA notes, is that all three of those companies are also competitors of cloud leader AMZN.

At the same time, Amazon counts one of its own biggest competitors—Apple Inc (NASDAQ: AAPL)—as a major customer for its cloud platform, with CNBC reporting this week that AAPL is spending more than $30 million a month on Amazon’s cloud even as AAPL invests to build its own data storage. With AAPL customers using one billion devices a month, AAPL has vast storage requirements, and AMZN’s cloud might be one beneficiary even though the two are rivals in other business areas.

Getting back to MSFT, total commercial cloud revenues rose 48% in Q2 to $9 billion while Azure revenues rose 76%. Azure growth was also 76% in Q1. The Q2 Azure growth was nothing to sneeze at, but the same as the previous quarter. Now we’ll see how things went in the first few months of 2019 at a time when corporate capital expenditures appeared to soften, according to the Fed and recent economic. data. 

One question is whether cloud growth in the company’s fiscal Q2 got hurt by the slowing global economy and may have bounced back in fiscal Q3. Shares of MSFT are up sharply so far this year, perhaps a sign that investors are optimistic that’s the case.

Over at Amazon, revenue from Amazon’s cloud platform Amazon Web Services rose 45% to $7.43 billion in Q4 and represented about 10% of the company’s total quarterly revenue. Like MSFT, the company could conceivably be dealing with slower capital expenditures from customers, and both MSFT and AMZN faced a stronger dollar in early 2019 vs. a year ago that might have slowed sales to overseas customers.
msft-chart-4-22.jpg
Figure 1: HEADS IN THE CLOUD: It’s been a quick elevator ride higher for shares of Amazon (AMZN - candlestick) and Microsoft (MSFT - purple line) so far in 2019, as this year-to-date chart shows. The question going into their earnings reports this week is whether the market’s optimism will be repaid with strong cloud growth for the two companies. Data Source: Nasdaq. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Beyond the Cloud

That said, analysts are expecting big things from both AMZN and MSFT, and that goes beyond cloud computing. Since MSFT started out as a personal computer software firm and Amazon started out as an online goods seller, those categories still play big roles in both their businesses. There’s optimism on Wall Street about MSFT’s Microsoft Office platform and Amazon’s impressive operating income gains. A healthy U.S. consumer could potentially help lift Amazon’s online retail and Whole Foods businesses.

However, Amazon Prime growth appears to be slowing, according to market research firm Consumer Intelligence Research Partners. That’s possibly troubling because Prime members tend to spend more at Amazon than non-Prime members.

Meanwhile, over at MSFT, there was some sequential revenue growth slowdown in both Productivity and Business Products and More Personal Computing segments from fiscal Q1 to Q2. Trends in those businesses—which include Office Commercial and Windows Commercial products—could be something to consider checking in fiscal Q3.

Looking back guidance for Q1, AMZN said net sales are expected to be between $56 billion and $60 billion, or to grow between 10% and 18% compared with Q1 2018. The revenue guidance was a bit lower than some on Wall Street had expected, and some analysts called it downbeat. Amazon also talked about possibly increasing its spending growth in 2019, which could potentially weigh on profits.

MSFT, whose Q2 revenue came in slightly below third-party consensus expectations, also shared revenue guidance that just missed the Street’s thoughts. Microsoft said then it expects fiscal Q3 revenue of between $29.4 billion and $30.1 billion. The midpoint of that range was just under the average analyst estimate when MSFT released the guidance. 

One thing to consider closely watching is MSFT’s revenue growth, which slipped from fiscal Q1 to fiscal Q2. It rose 12% year-over-year in Q2. 

And for anyone keeping score, MSFT enters earnings just ahead of AMZN in the battle for second place in total market capitalization (AAPL is back in the lead). As of the start of this week, MSFT had a market cap of around $950 billion, with AMZN at $922 billion. AAPL remains in sight of both at $965 billion.

Microsoft Earnings and Options Activity

When MSFT releases results, it is expected to report adjusted EPS of $1, up from $0.95 in the prior-year quarter, on revenue of $29.84 billion, according to third-party consensus analyst estimates. That revenue would represent 11.3% growth from a year ago. 

Options traders have priced in approximately a 2.8% stock price move in either direction around the upcoming earnings release, according to the Market Maker Move indicator on the thinkorswim® platform. Implied volatility was at the 21st percentile as of this morning. 

Looking at the April 26 weekly option expiration, call volume has been active at the 124 and 125 strikes, but the most active strike by far has been the 126 calls. Put volume has been active at the 120 and 123 strikes.

Amazon Earnings and Options Activity

When AMZN releases results, it is expected to report adjusted EPS of $4.72, up from $3.27 in the prior-year quarter, on revenue of $59.65 billion, according to third-party consensus analyst estimates. That revenue would represent 16.9% growth from a year ago.

Options traders have priced in approximately a 3.5% stock price move in either direction around the upcoming earnings release, according to the Market Maker Move indicator on the thinkorswim® platform. Implied volatility was at the 34th percentile as of this morning. 

Looking at the April 26 weekly options expiration, call volume was pretty light overall but heaviest at the 1900 strike. Put volume was also light, but heaviest at the 1850 and 1860 strikes.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.
Image sourced from Pixabay

Posted-In: Amazon earnings previewEarnings News Options Markets Tech General

 

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