Why Microsoft Will Move the Dow Tomorrow

The tech giant weighs in with earnings results this afternoon, and investors want to see signs of a turnaround. Find out what to expect.

Jul 22, 2014 at 11:00AM
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This earnings season, investors in the Dow Jones Industrials (DJINDICES:^DJI) have dealt with a number of surprises, both positive and negative. As the season moves forward, we're getting second and third looks at certain industries, and investors today will closely study Microsoft (NASDAQ:MSFT) and its earnings to see if they confirm what we've already seen from Dow tech peers IBM (NYSE:IBM) and Intel (NASDAQ:INTC). With Microsoft's share price having climbed so high, a disappointment could be devastating to the stock.

Msft Wikimedia
Source: Wikimedia Commons.

Microsoft will reports its results after the end of regular trading this afternoon, with the release usually made available to investors shortly after the market closes. The tech giant has a conference call scheduled to begin at 5:30 p.m. EDT.

Interestingly, investors have mixed expectations for Microsoft, with revenue seen soaring even though earnings per share will likely fall from the year-ago level. That's the opposite of what has been seen from tech companies such as IBM and Intel, which have focused on making greater profits from reduced revenue as they shift away from lower-margin niches toward more lucrative high-margin business. Yet in the long run, Microsoft has the same strategic goals as its peers, as it emphasizes making the most of the mobile revolution and ensuring that its lucrative software franchises remain relevant in a changing tech world.

Earnings reports from Intel and IBM have shown how important it has been for tech companies to ensure that their enterprise customers remain happy. Intel saw a surprising lift in PC sales in the most recent quarter, and most of that uptick came from enterprise customers choosing to upgrade their PCs in order to address Microsoft's end of technical support for the Windows XP operating system. Moreover, as technological advances in other areas have taken place, users need better hardware to support those changes, and Microsoft hopes to tap into that demand by providing necessary software to help businesses make best use of their higher-quality hardware.

Msft

Source: Microsoft.

At the same time, investors have punished tech companies that haven't figured out exactly which strategic direction they want to pursue. Microsoft is trying to balance many different efforts, including hardware like its Surface Pro 3 tablet/laptop hybrid and a variety of smartphones developed as part of the acquisition of Nokia's handset business. The company's move toward cloud-computing initiatives such as its Office 365 software has received a welcome reception from enterprise and consumer customers alike, and the resulting subscription revenue is exactly the sort of recurring and reliable cash flow that investors want to see. Yet CEO Satya Nadella faces the challenge of ensuring Microsoft doesn't get overloaded trying to boost all of its businesses' prospects at the same time.

Microsoft will move the Dow tomorrow, because its results not only project where the company will go but also whether old-line tech companies in general can adapt and compete in a rapidly changing environment. With Microsoft stock having already anticipated improvement in its underlying business, however, anything short of full success could send the Dow Jones Industrials downward on Wednesday.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel, International Business Machines, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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