Should You Invest in Microsoft (MSFT) This Week? Software giant Microsoft (MSFT) beat Wall Street's top-and-bottom-line estimates for the last reported quarter, driven by significant growth in its cloud services segment. Moreover, the company is taking several strategic...
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Software giant Microsoft (MSFT) beat Wall Street's top-and-bottom-line estimates for the last reported quarter, driven by significant growth in its cloud services segment. Moreover, the company is taking several strategic initiatives to integrate AI into its products and services. However, given a volatile macro backdrop, is it wise to invest in MSFT this week? Read more to find out….
Leading tech company Microsoft Corporation (MSFT) reported better-than-expected results for the first quarter of fiscal 2023. With AI's potential to transform the world, MSFT has been on the forefront of cutting-edge research in AI, integrating this powerful technology into its products and services. With the company flexing its muscles in cloud and AI, it is poised for robust long-term growth.
Given MSFT's solid fundamentals and bright growth outlook, it could be wise to invest in this tech stock this week for substantial returns. In this piece, I will discuss several reasons why I am extremely bullish on MSFT.
During the third quarter of 2023, MSFT surpassed Wall Street's revenue and earnings estimates, driven by growth in its cloud computing and Office productivity software businesses, and the software titan added that artificial intelligence (AI) products were stimulating its sales.
MSFT's revenue in the third quarter increased 7% year-over-year to $52.90 billion, topping Wall Street estimates of $51.02 billion, according to data from Refinitiv. The company reported earnings of $2.45 per share, beating analyst estimates of $2.23, according to Refinitiv.
In the latest reported quarter, the company's growth at its cloud business Azure was 27%, exceeding analyst expectations for 26.6% growth, according to the consensus of 23 analysts polled by Visible Alpha.
Most Microsoft sales come from selling computing devices, cloud systems and services, and software products to consumers and businesses. But MSFT grabbed headlines earlier this year with its partnership with ChatGPT creator OpenAI, as the tech company races to stake out its place in the generative AI field.
On January 23, MSFT announced a new multiyear, multibillion-dollar investment in San Francisco-based research outfit OpenAI, which grabbed headlines with the launch of ChatGPT. The deal marks the third phase of the partnership between the two companies, following MSFT's previous investments in 2029 and 2021.
The renewed partnership is expected to accelerate breakthroughs in AI and help both companies commercialize advanced technologies in the future.
Also, in February, the company launched an all-new, AI-powered Bing search engine and Edge browser to deliver better search, more complete answers, a new chat experience, a creative spark, and the ability to generate content.
MSFT's CEO, Satya Nadella, told investors on a conference call that MSFT will continue to focus on three priorities. First is assisting customers in using the depth of the Microsoft Cloud to get the most value out of their digital spend; second, investing to take the lead in the new AI wave across its solution areas. And third is driving operating leverage, aligning its cost structure with its revenue growth.
Satya Nadella added that the company has the most powerful AI infrastructure, which is being used by its partner Open AI and NVIDIA Corporation (NVDA), and other leading AI startups, including Adept and Inflection, to train large models. MSFT's Azure OpenAI bright together advanced models like ChatGPT and GPT-4 with the enterprise capabilities of Azure.
The company has more than 2,500 Azure-Open AI service customers, and AI is integrated into a wide range of products, MSFT's CEO said.
Shares of MSFT have gained 36.5% over the past six months and 39.2% year-to-date to close the last trading session at $333.56.
Here is what could influence MSFT's performance in the upcoming months:
Positive Recent Developments
On April 17, MSFT and Epic announced the expansion of their strategic partnership to integrate generative AI into healthcare. Combining the power of MSFT's Azure OpenAI Service with Epic's EHR software would enable the company to tackle urgent healthcare challenges and provide comprehensive solutions to providers. This collaboration should bode well for both companies.
On March 28, MSFT achieved a significant cybersecurity advancement with Microsoft Security Copilot, the next-gen AI technology. The innovative tool would allow defenders to swiftly detect, respond to threats and comprehensively understand the threat landscape.
Security Copilot is the first generative AI security product, allowing defenders to operate at AI's speed and scale. In three months since the company made Copilot available for Business, more than 10,000 organizations have signed up, including Coca-Cola Company (KO), General Motors Co. (GM), and Duolingo, Inc. (DUOL), all of these credit Copilot with increasing the speed for their developers.
Robust Financials
For the third quarter that ended March 31, 2023, MSFT's revenue increased 7.1% year-over-year to $52.86 billion, and its gross margin rose 8.8% from the year-ago value to $36.73 billion. Its operating income came in at $22.35 billion, up 9.8% year-over-year. The company's net income grew 9.4% year-over-year to $18.30 billion, while its EPS was $2.45, an increase of 10.4% from the prior-year period.
Furthermore, as of March 31, 2023, the company's cash and cash equivalents were $26.56 billion, compared to $13.93 billion as of June 30, 2022. Also, its current liabilities reduced to $85.69 billion, compared to $95.08 billion as of June 30, 2022.
Favorable Analyst Estimates
Analysts expect MSFT's revenue for the fourth quarter (ending June 2023) to come in at $55.42 billion, indicating an increase of 6.9% year-over-year. The consensus EPS estimate of $2.55 for the current quarter reflects a 14.5% year-over-year improvement. Also, the company has surpassed the consensus EPS estimates in three of the trailing four quarters.
Furthermore, analysts expect MSFT's revenue and EPS for the fiscal year 2023 to increase 6.6% and 4.7% from the previous year to $211.38 billion and $9.64, respectively. For the fiscal year 2024, the company's revenue and EPS are expected to grow 11.5% and 13.9% from the previous year to $235.74 billion and $10.98, respectively.
Reliable Dividend
MSFT has a record of increasing its dividend for 18 consecutive years. It pays a $2.72 per share dividend annually, translating to a 0.82% yield on the current price. Its four-year average dividend yield is 0.98%. The company's dividend payouts have grown at a 10.2% CAGR over the past three years.
High Profitability
MSFT's trailing-12-month gross profit margin of 68.26% is 37.8% higher than the 49.53% industry average. Its trailing-12-month EBITDA margin of 48.67% is 320.5% higher than the 11.58% industry average. Likewise, the stock's trailing-12-month net income margin of 34.37% is 966.5% higher than the industry average of 3.22%.
In addition, MSFT's trailing-12-month ROCE, ROTC, and ROTA of 42.88%, 21.97%, and 19.40% compare to the industry averages of 4.75%, 3.21%, and 1.52%, respectively. Its trailing-12-month levered FCF margin of 22.73% is 202.9% higher than the 7.50% industry average.
POWR Ratings Show Promise
MSFT's strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, translating to a Buy in our proprietary rating system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. MSFT has a B grade for Quality, in sync with its higher-than-industry profitability. In addition, the stock has a B grade for Sentiment, consistent with its solid financials and optimistic analyst expectations.
MSFT is ranked #12 out of 52 stocks in the Software-Business industry.
Beyond what I have stated above, we have also given MSFT grades for Value, Growth, Momentum, and Stability. Get access to all the MSFT Ratings here.
Bottom Line
Software powerhouse MSFT's revenue and EBITDA grew at 14.4% and 16% over the past three years, while its EPS increased at a 15.4% CAGR. Furthermore, the tech company is well-positioned to maintain its business momentum, supported by strength in its cloud services segment. Also, it continues to make efforts to infuse AI into its products and services.
Given its solid financial performance, diversified business model, high profitability, and promising growth prospects, it could be wise to invest in MSFT this week.
How Does Microsoft Corporation (MSFT) Stack Up Against Its Peers?
MSFT has an overall POWR Rating of B. One could also check out these other stocks within the Software-Business industry with an A (Strong Buy) rating: VMware Inc. (VMW), F5 Inc. (FFIV), and Sapiens International Corporation N.V. (SPNS).
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these "death trap" stocks are lurking in your portfolio:
MSFT shares rose $1.00 (+0.30%) in premarket trading Thursday. Year-to-date, MSFT has gained 40.17%, versus a 14.32% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet's keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet's looks to help retail investors understand the underlying factors before making investment decisions.
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