Earnings Preview: Microsoft, Amazon & Exxon Mobil

Microsoft – Tuesday 24 October

Tech giant Microsoft report their Q1 FY24 earnings after the US markets close on 25 October. Following a tumultuous 2022, Microsoft shares have been enjoying an impressive 2023 thus far. However, the past three-months have seen cracks appear in the bullish story, with the stock having lost approximately 10% since their all-time high in July. This pullback could bring an opportunity for those seeking an entry into a stock at the forefront of the AI revolution, particularly since its February launch of ChatGPT.

Last quarter saw Microsoft outpace market expectations, boasting earnings per share of $2.69 (+20% YoY) and revenues of $56.19 billion (+8%). However, optimism was slightly tempered by the company’s forthcoming guidance, which fell below expectations. This caution can be attributed, in part, to weakening PC demands. Moreover, the revenue growth of Azure Cloud, one of Microsoft’s major segments, slowed for the fifth consecutive quarter, even as it grew by 26% YoY.

One of the focal points in the upcoming earnings report will undoubtedly be Microsoft’s advancements in the Azure OpenAI Service. Their substantial $10 billion investment into ChatGPT earlier in the year showcased a deep commitment to AI development within cloud business. Following a March preview, the Azure OpenAI Service expanded its capabilities, notably introducing the Microsoft 365 Copilot, a valuable AI addition to foundational software products like Word and Excel. Considering that the Office suite contributes nearly 24% to Microsoft’s total revenue, and witnessed a 16% YoY growth in the last quarter, both Azure and Office 365 revenues will garner significant attention in the report. Additionally, CFO Amy Hood hinted that the major financial influences of their AI services would become more prominent later in FY24.

Looking ahead, markets are looking for Q1 FY24 earnings per share of $2.65. That represents a 13% gain compared with last year, but a decline from the $2.69 figure last quarter. Revenues are similarly expected to rise over the year, but weaken compared to last month.

Amazon – Thursday 26 October

Amazon earnings look to provide insights into US consumption levels under the weight of rising interest rates in the third quarter. Three months ago, the tech giant managed to blast through estimates, driving earnings per shares into the highest level in six-quarters. That raises question marks over the ability to maintain the upward trajectory as US consumers deal with a sharp increase to the cost of living. Thus far, retail sales data has highlighted continued strength on the spending-front, with rising wages helping to alleviate the pressure for now.

The Amazon web services cloud segment remains a key driver of growth, although the second quarter saw growth slow somewhat to 12% (vs 16% in Q1). There is a hope that AI investment will ultimately benefit the AWS service, although that hasn’t come to fruition quite yet. Advertising also provides a key element to watch, with a 22% gain in the second quarter highlighting the growing influence of this segment.

There is a hope that the company will continue to gain ground as spending habits largely overlook any negative impact from higher rates. The impact of inflation has been to increase the value of goods being sold, and Amazon should benefit from that as long as clients do not limit the number of items they purchase in response. With EPS expected to come in around $0.58 (vs $0.65) for the quarter, markets are looking for consolidation of the Q2 performance rather than any blockbuster figure. That may provide the basis for outperformance should conditions allow.

ExxonMobil – Friday 27 October

Big oil is a major theme for traders next week, with giants ExxonMobil and Chevron both reporting. From a sector perspective, energy names are expected to report the biggest drop in annual earnings (-37%). However, the quarterly picture looks to provide a more positive shift according to ExxonMobil estimates, with earnings per share expected to reverse upwards after four consecutive declines. The obvious driver of revenues will be the value of underlying commodities, with the Brent global benchmark rising from $72 per barrel to $97 over the three-month period.

According to an October disclosure from ExxonMobil, the company expects profits to receive a healthy boost from higher oil, gas and fuel prices. That has lifted the outlook for earnings and revenues, with operating profits expected between $8.3 billion and $11.4 billion. That would represent a rise from the second quarter, but below the figure a year ago.

The recent purchase of Pioneer Natural Resources highlights the consolidation seen in US shale, with ExxonMobil now the biggest player. Despite speculation that Joe Biden’s policies could lead to the demise of US oil, we have seen record output this year. With this purchase, they have hugely strengthened their footprint in the largest oil producing region in the US (Permian Basin). This signals to investors that they play to continue their focus on fossil fuels as competitors such as Shell transition towards a green strategy.