A Real Earnings Surprise: Microsoft Corporation Is Becoming Apple

As recently as last year, the notion that analysts and investors would give Microsoft (NASDAQ: MSFT  ) a break would have seemed outlandish. Mired in a multi-decade slump, Microsoft and its stock price seemed irrevocably stuck in neutral, making it an easy target for naysayers. Now, fast-forward a year as Microsoft's new CEO, Satya Nadella, prepares for his first earnings announcement faced with so-so analyst expectations, and its stock price is still holding up nicely. That kind of support used to be reserved for stalwarts like old nemesis Apple (NASDAQ: AAPL  ) . Not any more.

In the past, forecasting what many expect to be a flat quarter compared to Microsoft's year-ago period would have been a recipe for a stock-price disaster. But times have changed, as has Microsoft, since the days of not being able to please anyone, at any time. That title seems to belong to Apple now, which can't seem to get out of its recent stock price funk. The year-to-date stock performance of the two former adversaries tells the story: Microsoft is up 5.75% and Apple is down 5.8%.

Some background
Last quarter Microsoft announced earnings and revenue that exceeded most everyone's expectations. Former CEO Steve Ballmer's better-late-than-never transition to cutting-edge technologies like cloud computing and big data, along with moving the Microsoft team headlong into mobile, began paying off in its fiscal Q2 ending Dec. 31, 2013.

Microsoft ended the holiday season with a record-breaking quarter, generating a total of $24.52 billion in revenue, a 14% jump on a GAAP basis compared to the prior year's Q2. Not bad, but what really got investors excited was how Microsoft was able to achieve its lofty results. Commercial cloud sales, along with the number of Office 365 and Azure customers, all more than doubled last quarter. Even Microsoft's devices and services revenue increased to $11.91 billion, a 13% jump compared to last year.

Apple, as it prepares for its earnings announcement after the close today, has suffered from a lackluster stock price in large part because of a perceived lack of innovation. Yes, the iPhone continues to dominate the domestic smartphone market, Apple has more ready cash than most small countries, and it has a rabid base of iFans. But with concerns about entering emerging markets with nothing but a high-end lineup of iToys, and little new coming down the pike in what feels like forever, Apple needs a blow-out quarter and a cutting-edge product for its stock price to gain some traction.

That was then, this is now
Another example of the change in views of the two industry leaders are the number of pundits who not only expect Microsoft to meet estimates but beat them. It was estimates that were to blame for Apple's difficult year-to-date share-price performance. Apple CEO Tim Cook jump-started a sell-off that ended up shaving over $44 billion in market cap last quarter by announcing guidance -- for this quarter -- below expectations. That type of knee-jerk reaction used to be Microsoft territory.

The consensus estimates are for Microsoft to generate $20.6 billion in revenue in fiscal Q3, along with earnings per share of $0.62. By comparison, 2013's Q3 results were $20.5 billion in revenue, which translated to $0.72 a share in earnings. Flat year-over-year revenues and a 16% decline in earnings per share wouldn't normally be cause for celebration.

Apple, much like Microsoft, is expected to announce flat revenues and earnings compared to last year. Consensus estimates suggest Apple will generate $43.42 billion in revenue in its Q2 and earnings of $10.18 a share. Last year at this time, Apple had $43.6 billion in sales and had earnings of $10.09 a share. But when Cook shared the so-so quarterly guidance, Apple stock got battered.

Final Foolish thoughts
Analysts and investors alike have chosen to focus on Microsoft's future, and that means monitoring results in the aforementioned key areas of cloud computing and mobile. Sales of over five million Xbox One's is great, but that's not what's driving Microsoft's good tidings among investors. What is?

In short, Nadella. When Nadella introduced Microsoft's much-anticipated Office for iPad, he quickly became the star of the show, and his "mobile first, cloud first" mantra struck a positive chord with Microsoft shareholders. Tellingly, Nadella also mentioned the need to continually innovate. That's a word that used to be the driving force behind Apple.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 23, 2014, at 3:34 PM, LADJ wrote:

    "Apple can't seem to please anyone now..."

    Except its customers.

    And because of that, Microsoft will never be Apple.

  • Report this Comment On April 24, 2014, at 12:09 PM, devvvv wrote:

    Well due to the fact Microsoft has introduced office for ipad for enterprise and the health care market, it appears this may spell the end for BlackBerry.

  • Report this Comment On April 24, 2014, at 12:14 PM, SkepikI wrote:

    Yes its true! I am so ticked at MS over XP drop that I am converting to Apple! And so are lots of others. Strange that Apple gets lots of love and MS generates so much disdain....

  • Report this Comment On April 24, 2014, at 12:44 PM, VegasSmitty wrote:

    The MF is demonstrating daily how they earned the named "Fool".

  • Report this Comment On April 25, 2014, at 10:36 PM, danialwilson wrote:

    It is fact that microsoft is getting good earnings happy news for investors but still we couldn't called microsoft as a Apple

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Tim Brugger

Tim has been writing professionally for several years after spending 18 years (Whew! Was it that long?)in both the retail and institutional side of the financial services industry. Tim resides in Portland, Oregon with his three children and the family dog.

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