Is MSFT Stock a Buy With Earnings and xCloud Launch on the Horizon?

Brad Moon

When Microsoft (NASDAQ:MSFT) reported fourth-quarter and full-year earnings in July, the company impressed analysts and investors, blowing past estimates for both earnings and revenue. The next earnings report for the trillion-dollar company is due in five weeks. And after closing at $136.33 yesterday, MSFT stock sits almost exactly where it did the day after those Q4 earnings. That’s off from the final week of July and a few days in September, when Microsoft stock topped the $140 level — but up 34% from the start of the year.

MSFT a buy with earnings and xCloud coming in October

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With MSFT expected to report Q1 earnings on October 24, and Project xCloud expected to make its debut in October, is now the time to consider an investment in the high-flying tech company?

Q1 Earnings Have the Potential to Boost MSFT Stock

In July, Microsoft delivered strong Q4 results and a record fiscal 2019. Revenue of $33.7 billion handily beat analyst expectations. Earnings per share of $1.71 also topped expectations and blew past the $1.14 the company delivered in Q4 2018. With cloud computing becoming an increasingly important part of MSFT’s game plan, Azure revenue was up 64% in the quarter. 

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The company is expected to report Q1 2020 earnings on October 24, and analysts are looking for EPS of $1.24 compared to the $1.10 Microsoft delivered a year ago. 

There’s a good chance MSFT stock rises ahead of earnings in anticipation of big numbers.

The X-Factor: Project xCloud

Cloud gaming services have the potential to be one of the more interesting developments of 2019. The big one that everyone has been waiting for is Stadia, from Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google. Billed as “the future of gaming,” Google Stadia leverages cloud computing hardware to let subscribers play high resolution, AAA PC video games in a browser on very modest hardware. Even a smartphone or a tablet.

Google may have been stealing the headlines for the past several years — and causing some consternation among MSFT investors over the possibility that Stadia might disrupt Xbox console gaming, but Microsoft has hardly been sitting still.

Microsoft has 17 years of game console experience and that surging Azure cloud computing division. Naturally, the two are being mashed together. Microsoft’s Project xCloud was officially announced last October, with MSFT providing further details in March. Microsoft sees Project xCloud as opening up Xbox-class gaming to consumers who may not otherwise have access to consoles, leveraging 54 global Azure cloud centers to deliver console-quality gaming to mobile devices. 

At the 2019 EX game conference, Microsoft announced that Project xCloud will be launching as a public beta sometime in October. Pricing, regional availability and launch titles were not announced, but the timing finally sets up MSFT for a showdown against Google Stadia — which launches in November at $9.99 per month.

Project xCloud has the potential to help take the edge off the rapid decline in Xbox revenue (consoles aren’t selling as gamers wait for the next generation), while bolstering the number of players in the Xbox camp. If it’s a success, it will help to mitigate the threat from Google Stadia. And by adding subscription revenue, it would also help to even out revenue fluctuations (a model that MSFT has employed with great success for its Office productivity suite).    

There is also some risk involved here, though. If Project xCloud stumbles, the black eye would come at a bad time for Microsoft, especially with its next generation Xbox console launching in 2020.

Should You Buy MSFT Now?

If you ask the professionals, it’s a no-brainer: buy MSFT stock. Of the 33 analysts polled by the Wall Street Journal, 27 of them have MSFT rated as a “buy” with $155.38 as the average 12-month price target for Microsoft stock. That offers a nice bit of upside for investors, with the possibility that Project xCloud could factor into the equation and provide a much-needed gaming boost going into the holiday quarter. 

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

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