Preparation Into Earnings Season

Microsoft: What to Look For

Some of you are seasoned hedge fund managers. Some of you are entirely new to stock picking. Regardless of your experience level, there is a critical understanding of the set up that is needed into every earnings report. Is the bar high? Is the bar low? What are the most important metrics this quarter, in particular, that will be the focus? It requires some level of history with trading the stock, the sector and the management team’s general modus operandi. Is it a beat and raise situation? Yes, the more conference calls you have listened to or read, the more you will appreciate the nuances of the after-hours stock reaction, and whether it is the correct reaction! All that said, I thought I would share the preparation I do in front of a company reporting. I choose Microsoft, a name I have traded my entire career.

On the one hand, “trading” Microsoft was a bad idea! Buy and Hold!!! This stock is now at an all time high market cap ($3.5 trillion) and a very full 35 times FY 2025 earnings. Is the stock still a secular winner and buy and hold will work from here? Perhaps. I will pass on that discussion for another time except to say at a full P/E multiple, the stock more likely goes up by the growth rate of EPS moving forward or around 10-15%. Can 35x EPS be maintained and slapped on FY2026 estimates giving the stock a 18-20% boost? Sure. But, the multiple can also contract to 30x or lower, dropping the stock 20% if there is a hint of “slowing” to the narrative. So, let’s review my notes I use internally at my firm for the Microsoft set up and discuss it on the other side.