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Microsoft share price: EPS expected to rise 27.1% based on upcoming Q3 report

The Microsoft share price is up slightly this week ahead of its Q3 report. Due to be published at the close of trading on 27 April, Microsoft’s Q3 earnings report is expected to show faster growth than in the last ten quarters.

Microsoft (MSFT.O) shares have increased 1.4% over the last five days from $257.92 to $261.55. The bullish trend is the result of positive expectations in the latest Microsoft quarter three (Q3) earnings previews. The company’s fiscal year (FY) ends on 30 June, and it will publish its Q3 FY 2021 results on 27 April. Early analysis suggests that adjusted earnings per share (EPS) will be $1.78, which is an increase of 27.1% year-on-year (YoY).

Microsoft Q3 revenue projected to hit three-year high

This figure is based on a consensus revenue estimate of between $40.8 billion and $41.1 billion. Based on the top estimate, Microsoft’s Q3 revenue would be 17.4% higher than Q3 2020, and 34.3% higher than Q3 2019. Alongside these facts, historical data shows that Microsoft’s earnings have beaten EPS estimates eight times over the last two years. Moreover, the tech company has beaten revenue estimates 88% of the time over the last two years.

The focus ahead of Microsoft’s Q3 2021 earnings report is the recent purchase of Nuance Communications (NUAN.O). The $19.7 billion deal was announced on 12 April and led to a small spike in the Microsoft share price. The long-term aim is to use Nuance’s conversational artificial intelligence (AI) technology to meet the cloud computing needs of the healthcare sector. However, financial market strategist and Forbes contributor JJ Kinahan believes the takeover may trigger another series of acquisitions.

Kinahan wrote on Forbes.com: 'Microsoft’s acquisition of Nuance adds another point to the buying-spree narrative that appears to be unfolding.'

Why could Microsoft start spending?

Kinahan’s analysis is based on the fact that Microsoft purchased video game and virtual reality (VR) company ZeniMax Media for $7.6 billion in March. Prior to that, it tried to purchase TikTok for $30 billion, and chat app Discord for $10 billion. Moreover, the takeover of Nuance is Microsoft’s biggest acquisition since it bought LinkedIn for $26 billion in 2016. These actions suggest, to Kinahan at least, that Microsoft’s financials are in a strong position and that it’s looking to expand its portfolio.

Microsoft shares and, therefore, the company’s Q3 report may also hinge on Azure. Microsoft’s cloud computing business is expected to grow at a slower pace than in previous years. Consensus estimates predict YoY revenue growth of 46.3%. That’s down on last year’s growth rate (58.2%) but still represents a strong performance. Indeed, Azure, which offers cloud computing services for IT professionals and developers, now has a 20% market share. The only company to have a greater share of the market is Amazon (AMZN.O).

What is fuelling Microsoft's share price?

This could be the tale of the Microsoft Q3 earnings report. Azure has become a major contributor to the company’s overall revenue in the three years. This year, analysts expect it to generate $7.7 billion for the quarter. That would put Microsoft on track to meet or exceed the current estimates.

Long term, the Microsoft share price could derive a lot of its value from Nuance Communications and the company’s position in the healthcare sector. In tandem, analysts seem to agree that these two facets of Microsoft will drive EPS to $1.78 in the forthcoming earnings report.

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