Zacks Investment Ideas Highlights: Apple, Amazon, Alphabet, Activision Blizzard and Microsoft

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Chicago, IL – April 25, 2022 – Today’s Zacks Investment Ideas feature highlights Apple AAPL, Amazon AMZN, Alphabet, Inc. GOOGL, Activision Blizzard ATVI, and Microsoft MSFT.

As third quarter results approach, is Microsoft (MSFT) a buy?

Tech stocks have fallen year-to-date, with many high-flying companies grossly underperforming the broader market. Below is a chart that illustrates the year-to-date performance of four major technology stocks – Apple, Amazon, Alphabet, Inc. and Microsoft – while also comparing the performance of the S&P 500 and the Zacks – Computer and Technology Sector.

As we can see, it’s been a tough year for technology. In fact, Apple is the only tech stock on the list to show a higher level of defense than the general market year-to-date. Near the bottom of the chart with the worst year-to-date performance is Microsoft.

However, looking at the performance over the past year, we can see that Microsoft is actually the second best performer. Amazon is the only tech stock on the list that hasn’t outperformed the general market over the same period.

While Microsoft has been generally strong over the past year, the current year-to-date performance represents a slight recent disconnect from its tech peers. MSFT is expected to report third quarter 2022 results next Tuesday after the bell rings, so let’s analyze the critical aspects ahead of the report and see if stocks are likely to rebound.

Price impact of previous profits

In its Q2 2021 earnings release, MSFT reported earnings of $2.48 per share, which easily beat Zacks’ consensus estimate of 8%. It seems that the market was expecting more; shares rose just 0.11% after the report.

In fact, Microsoft’s stock price has only increased in value three times over its last six earnings reports, despite beating EPS estimates in all of them. The biggest impact on the stock price came in its first quarter 2021 report, where shares climbed nearly 5% after October’s month-long report that the Nasdaq, rich in technology, gained 7%. With the Nasdaq struggling year-to-date (down nearly 16%), a strong earnings release may not be enough to break the downtrend.

Growth engines

For the third quarter, metrics investors need to watch closely include Microsoft’s cloud (Azure) revenue and revenue from its gaming services. These are two essential growth engines moving forward; the gaming industry is booming and cloud computing is continually becoming a vital aspect of technology.

MSFT’s cloud revenue hit $22 billion in its most recent quarter, a remarkable 32% year-over-year increase. At present, Microsoft is the second largest cloud-based infrastructure provider behind Amazon. Additionally, MSFT’s gross margin for its cloud services increased by $2.3 billion, or 21%, in the second quarter of 2022, driven by growth in Azure and other cloud services.

In the second quarter, revenue from its gaming services increased $411 million, or 8%, benefiting from the launch of its Xbox Series X|S and stay-at-home orders. Additionally, with its acquisition of Activision Blizzard in January, Microsoft intends to release all Activision Blizzard games on its Xbox Game Pass, a service with over 25 million subscribers that costs $9.99 per month. ATVI’s games library, which has more than 400 million monthly active players, is expected to boost Microsoft’s gaming revenue in the future.

Microsoft Corporation Quarterly Revenue | Microsoft Corporation Quote

Q3 estimates

For the third quarter, the consensus estimate trend has changed moderately over the past 90 days, currently reflecting quarterly earnings of $2.18 per share vs. EPS of $1.95 in the third quarter of 2021. Additionally, an analyst has revised down its EPS estimates for the third quarter in the past 60 days.

Zacks’ consensus estimate for third-quarter revenue is approximately $49 billion, reflecting a year-over-year revenue increase of a notable 17% . In Q2 2022, MSFT raised $45 billion and exceeded revenue estimates by nearly 3%, driven by robust adoption of Azure cloud offerings.

The unfavorable currency is expected to delay revenue growth by 2% for the next quarter. Productivity and business process revenue is forecast between $15.6 billion and $15.85 billion; the strong momentum of Office 365 should drive growth in this segment.

Cloud services and commercial products are expected to see sub-double-digit growth, driven by demand for Microsoft 365 and advanced security solutions. Additionally, gaming revenue is expected to grow in the mid-single digits, but MSFT says Xbox Series S | X could potentially affect the growth of its gaming segment.

Overall, Microsoft is able to capitalize on strong and well-established trends within its segments. However, usage and revenue for the company’s products have increased significantly due to pandemic restrictions, and Microsoft sees this as a factor that could slow growth rates in the future.

Apple

Another tech giant, Apple, is also expected to report quarterly results next week. Over its past four quarters, Apple has gained a notable average EPS surprise of 20%, and in its latest report, the AAPL beat double-digit estimates to 11%.

Analysts expect quarterly EPS of $1.44, boosted by three positive estimate revisions in the past 60 days and reflecting 3% year-over-year earnings growth. Earnings are expected to rise nearly 10% for the current fiscal year.

Zacks Consensus’ sales estimate for AAPL is $94 billion, compared to $89.6 billion in sales for the year-ago quarter. Additionally, heading into the quarterly report, Apple has an ESP score of 0.54%.

Apple is a Zacks Rank #2 (buy) with an overall VGM score of B.

Apple Inc. price-consensus-eps-surprise-chart | Quote Apple Inc.

Conclusion

With the tech-heavy Nasdaq down significantly year-to-date, tech stocks have been selling off most of 2022. No one has a magic crystal ball that tells them where the market is heading next. , but until tech stocks break their downtrend, it could be beneficial for investors to wait before buying shares of these high-flying companies.

Basically, Microsoft has consistently shown strong growth rates and EPS estimates have been rising. However, the company’s revenue was boosted by an increase in stay-at-home orders and other constraints that pushed the world to go online.

The year-to-date performance of tech stocks keeps me from being aggressive at this time, but overall I think Microsoft is a great long-term investment. Microsoft is currently a Zacks Rank #3 (Hold) with an overall VGM score of a D.

Microsoft Corporation price-consensus-eps-surprise-chart | Microsoft Corporation Quote

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Past performance is not indicative of future results. The potential for loss is inherent in any investment. This document is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold any security. No recommendation or advice is given as to whether any investment is suitable for any particular investor. It should not be assumed that investments in the securities, companies, sectors or markets identified and described have been or will be profitable. All information is current as of the date hereof and is subject to change without notice. The views or opinions expressed may not reflect those of the company as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management of securities. These returns come from hypothetical portfolios composed of stocks with Zacks Rank = 1 that have been rebalanced monthly without transaction fees. These are not the returns of actual stock portfolios. The S&P 500 is an unmanaged index. To visit https://www.zacks.com/performance for more information on the performance figures displayed in this press release.

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