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Cloud Contest: Microsoft And Amazon Fight Battle As Earnings Loom

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Cloud Contest: Microsoft And Amazon Fight Battle As Earnings Loom

It may sound like a movie, but “JEDI” could be a hot earnings call topic for both Microsoft Corporation (NASDAQ: MSFT) and Amazon.com, Inc. (NASDAQ: AMZN) this quarter. JEDI stands for joint enterprise defense infrastructure, a $10 billion Department of Defense contract both companies are competing for.

The contract is expected to be rewarded in late August, according to The New York Times, and is meant to bring the military into the modern era of cloud computing. 

MSFT, which reports fiscal Q4 earnings on Thursday after the close, hopes to see the government choose its Azure cloud computing service, while Amazon is trying to get the bid directed to its Amazon Web Services (AWS). The earnings calls could be important for investors seeking an update on the project, though it’s unclear if executives at either company can add much in the way of new color this late in the game.

Down below the clouds and back on Wall Street, the hits just keep on coming for the Technology sector in 2019, and Microsoft’s sizzling shares are a big part of that as its cloud business grows. Meanwhile, AMZN, which is set to report on July 25, saw its shares move back above $2,000 again recently.

By the end of last week, shares of MSFT were up more than 36% year-to-date, outpacing 31% gains for the Technology sector as a whole and 20% gains for the S&P 500 Index (SPX). That partly reflects investors’ expectations for steady (though not stellar) growth in the company’s fiscal Q4 earnings, which bow this Thursday after the closing bell.

AMZN, which is expected to report earnings after the close on July 25, is up 27% year-to-date, a little behind Technology as a whole. However, AMZN is officially in the Consumer Discretionary sector, which is up 26% year-to-date.

Microsoft Still Number One in Valuation

Both earnings and revenue at MSFT are seen rising in the mid-to-high single digits for the quarter, analysts say. The big focus, however, is likely to be on cloud revenue.

MSFT and AMZN continue to compete not only for cloud share but also to be the most highly-valued stock by market capitalization. MSFT recently rose above $1 trillion in market cap, while AMZN is only slightly behind MSFT and also just above $1 trillion. Apple Inc. (NASDAQ: AAPL), which once had led the valuation battle, is about $70 billion behind in third place, for now.

MSFT and AMZN arguably dominate the growing cloud infrastructure, but recent fast growth leaves some analysts wondering how much more they can deliver. For instance, MSFT’s Azure revenue rose 73% in the company’s fiscal Q3, so consider keeping an eye on Q4 Azure results to see if the segment continues to pile up the gains. A quarterly slowdown in year-over-year growth might get a fish-eye from investors, partly because even the 73% last quarter was a slight fall from the previous quarter.

One analyst recently told MarketWatch that he believes Microsoft’s Commercial Cloud, including both Office 365 Commercial and Azure, could be the primary driver of growth for the company going forward. Azure, the analyst said, could command 25% of the public cloud market by 2025, up from its current 19% share, and account for nearly 60% of revenue versus the current 30%.

However, MarketWatch reported, another analyst thinks Azure could face a major competitive challenge from Amazon Web Services, which might be able to “grind down” Azure on cloud services with thin margins.

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.

From a bigger picture perspective, research firm CFRA says MSFT’s growth has accelerated, but may have peaked. On the plus side, however, CFRA wouldn’t be surprised to see MSFT continue with its recent big share repurchases and dividend increases.

Last time out, MSFT reported earnings and revenue that beat Wall Street’s estimates. The strength was driven in part by cloud acceleration, and shares rose. Microsoft’s commercial cloud business, which includes Azure, grew 41% in FY Q3 to $9.6 billion. At the time, Microsoft said on its earnings call that revenue in its FY Q4 will be $32.2 billion to $32.9 billion, right about where analysts had expected.

In one sense, you could argue that MSFT’s success in the cloud could be cannibalizing some demand for its traditional Word and Excel businesses as users move to the cloud-based Office 365 suite. One analyst told Barron’s recently that there’s concern about MSFT having to support lower-margin “consumer” businesses like Word in the future. Speaking of consumer, another area to consider focusing on in FY Q4 is the company’s LinkedIn business, which grew an impressive 27% in FY Q3.

One question for both MSFT and AMZN  is whether cloud growth this spring got hurt by the slowing global economy. Much of the recent U.S. and economic data, including from purchasing managers, indicates slowing demand for products of all sorts over the last few months. Monday’s report that China’s economy grew 6.2% in Q2—the slowest in 27 years—just added to worries about economic health.

Both AMZN and MSFT are likely to be asked about the U.S./China trade battle when analysts pick up the phones for their earnings calls. Both companies have huge businesses across the world and might be able to provide perspective on the economic impacts.


Figure 1: SUMMER WARM-UP: After a rough spring, shares of both Microsoft (candlestick) and Amazon (purple line) pepped up in June and July as the overall market reacted to hopes for a dovish Fed and new talks with China. Data Source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Prime Time for Amazon

AMZN’s earnings report comes soon after its most recent “Prime Day” event that took place July 15-16. The event is designed to spark sales volume during what’s traditionally been a seasonal slow period for the company, and analysts were looking for sales of more than $6 billion associated with the event.

It could also be interesting to see if the event drove any incremental growth in Prime subscribers for the company, who tend to spend more than non-Prime customers.

Last time out, AMZN’s quarterly results easily beat analysts’ estimates for earnings per share, but came in just on target with revenue. One concern is that revenue growth at the company has been slowing down a little even as profits remain strong thanks in part to the cloud business. Amazon’s cloud service saw solid growth with a 41% sales increase, although that was below the previous year’s 49% growth rate.

Looking back at guidance for Q2, AMZN said net sales are expected to be between $59.5 billion and $63.5 billion, or to grow between 13% and 20% compared with Q2 2018. The revenue guidance was slightly below what some on Wall Street had expected. 

Something else to potentially keep an eye on with AMZN are its advertising revenues, where growth slowed pretty significantly in Q1. Also, the company’s spending plans continue to get a close look from analysts.

Microsoft Earnings and Options Activity

When MSFT releases results, it is expected to report adjusted EPS of $1.21, up from $1.13 in the prior-year quarter, on revenue of $32.75 billion, according to third-party consensus analyst estimates. That revenue would represent 8.9% 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 24th percentile as of this morning. 

Microsoft call options have been active at the 135 and 140 and 145 strikes primarily in the July monthly cycle, but the most active has been the 140 call. Put volume has been active at the 135 and 130 strikes.

Amazon Earnings and Options Activity

When AMZN releases results, it is expected to report adjusted EPS of $5.58, up from $5.07 in the prior-year quarter, on revenue of $62.46 billion, according to third-party consensus analyst estimates. That revenue would represent 18.1% growth from a year ago.

The options market has priced in approximately a 2.7 % stock price move in either direction around the upcoming earnings release. Implied volatility was at the 17th percentile as of this morning. 

Looking at the July 26 weekly options expiration, call volume was pretty light overall but heaviest at the 2050 strike. Put volume was also light, but heaviest at the 2000 and 1950 strikes.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

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 MicrosoftEarnings News Global Markets Tech General Best of Benzinga

 

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