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The slowdown in personal computer sales due to supply-chain issues in recent months would have hurt Microsoft Corp. in past years, but the companys pivot to cloud computing and cloud software should insulate it from any earnings fallout.

Microsoft MSFT, -0.51% is scheduled to report its fiscal first-quarter earnings on Tuesday afternoon, as it rolls out its new Windows 11 operating system and PC makers struggle to deliver new machines. While the Microsoft of Bill Gates and Steve Ballmer would have faced a lot of Wall Street pessimism if PC shipments were mangled and a new operating system was not quickly adopted, Satya Nadellas Microsoft should be just fine.

That is because analysts and investors are mostly focused on Azure, Microsofts cloud-computing answer to Amazon.com Inc.s AMZN, -2.90% Amazon Web Services, as well as cloud-software offerings, decreasing the importance of Microsofts PC business.

Sustained digital transformation momentum should offset the impact from mixed PC unit shipment estimates from IDC and Gartner, Morgan Stanley analysts wrote in a preview of the report, later adding, While our negative growth outlook for Windows OEM pressures our longer term earnings expectation for Microsoft, we also note Windows OEM overall represents a decreasing mix of overall Microsoft revenue and gross profit.

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Azure has made sure that Windows importance to Microsoft has decreased. The fast-growing cloud business is at the top of every analyst note about Microsoft, and analysts expect revenue to grow in the mid-40% range. (Microsoft does not disclose Azure performance except for percentage gain, despite AWS and Google GOOGL, -3.04% GOOG, -2.91% Cloud providing full revenue and operating profits for their competitive services).

Fundamentally, ramping contribution from previously signed long-term Azure deals, continued Cloud migrations post-COVID, Microsofts intensifying focus on Cloud verticalization and strong Microsoft 365 seat growth can sustain durable longer-term Azure growth, the Morgan Stanley analysts wrote.

There are factors that could add to Microsofts growth as well, especially in the forecast. The $19.7 billion acquisition of health-care-focused company Nuance is expected to close before the end of the calendar year, and Microsoft recently disclosed that its cloud-based revenue would dump into the same revenue bucket as Azure.

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While Microsoft did not disclose exactly how much that would mean, UBS analysts said in September that prior Nuance disclosures and a call they had with the companys investor relations team led them to estimate that about 46% of Nuances revenue would be cloud-based. They estimated that would mean roughly $91 million in additional sales for Microsofts cloud division in the fiscal second quarter, if the full quarter were to be included.

Another bump could be coming in the future from increased prices for Microsofts most popular cloud software offering, Office 365. Microsoft is increasing prices more than 10% across the board for the product, which the company described as the first substantive pricing update since we launched Office 365 a decade ago, which also gives analysts confidence that Microsoft can withstand any supply-chain pressures on the PC market.

Earnings: Analysts on average expect Microsoft to report earnings of $2.08 a share, up from $1.82 a share a year ago. Contributors to Estimize a crowdsourcing platform that gathers estimates from Wall Street analysts as well as buy-side analysts, fund managers, company executives, academics and others predict earnings of $2.22 a share.

Revenue: Analysts on average were modeling sales of $43.93 billion, which would be an improvement from $37.15 billion a year ago, after Microsoft forecast revenue of $43.3 billion to $44.2 billion. Estimize contributors expect $44.88 billion in sales.

Analyst expect $16.52 billion in sales from the Intelligent Cloud segment, after Microsoft guided for $16.4 billion to $16.65 billion; $14.67 billion in sales from the cloud-software-focused Productivity and Business Solutions segment, after a forecast of $14.5 billion to $14.75 billion; and $12.72 billion from More Personal Computing, after guidance for sales of $12.4 billion to $12.8 billion.

Stock movement: Microsoft shares have declined in the session following earnings releases in four of the past five quarters, though the last decline was only by 0.1%. The stock has increased 8.1% in the past three months and 45.2% in the past year, as the S&P 500 index SPX, -0.11% has grown by 4.1% and 31.6% in those periods, respectively.

Analysts are in pretty universal agreement about Microsofts current position. According to FactSet tracking, 33 out of 36 analysts rate the stock the equivalent of a buy, while the other three rate it as a hold.

Currently trading at ~27x our CY23 GAAP EPS estimates, Microsoft represents a rare combination of strong secular positioning and reasonable valuation within the software space, wrote the Morgan Stanley analysts, who rate the shares overweight with a price target of $331.

The once concern seems to be the durability of the current growth trajectory, which is why the Nuance acquisition and increased pricing of Office 365 is seen as key to the stock continuing to rise.

Comps get progressively tougher throughout FY22, which should be met by Microsofts durable growth portfolio of Azure/Security/Teams, wrote Jeffries analysts, who have an outperform rating and recently raised their price target to $375 from $345. Key items to watch are elevated expectations (Azure high 40s reported), integration with Nuance and increased security investments.

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Microsoft has benefitted from the pandemic, as companies have relied on cloud-computing power and software to keep teams connected while working remotely. But Microsoft bull and Wedbush analyst Daniel Ives does not see a return to the office as a sign that the boom will end.

We believe the Streets view of moderating cloud growth on the other side of this WFH cycle is contrary to the deal activity Microsoft is seeing in the field, Ives, with an outperform rating and $375 price target, wrote in a preview of the report. While we have seen the momentum of this backdrop in the last few years, we believe deal flow looks incrementally strong (Office 365/Azure combo deals in particular) heading into FY22 as we estimate that Microsoft is still only ~35% through penetrating its unparalleled installed base on the cloud transition.

Stifel analysts, with a buy rating and $325 price target, concurred.

We continue to believe that the pandemic is forcing organizations to accelerate the pace of their cloud migrations and that Microsoft remains a key beneficiary of this modernization spend, especially around large new deal momentum, as its broad stack enables it to capture Tier 1 workloads previously out of reach, they wrote.

The average price target on Microsoft stock as of Friday afternoon was $335.47, roughly 8.5% higher than the going rate.

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The PC slowdown shouldn't hurt Microsoft earnings, and here's why - MarketWatch