Is Microsoft Stock a buy it now?

Microsoft (NASDAQ: MSFT) released its second-quarter earnings report on Jan. 25, and the tech giant easily exceeded analysts’ expectations.

Its revenue rose 20% year-over-year to $51.7 billion, beating estimates of $910 million. Its net profit improved 21% to $18.8 billion, or $2.48 per share, beating expectations of $0.16.

Those numbers were impressive, but should investors still buy Microsoft stock as rising interest rates hit the tech sector? Let’s take a look at Microsoft’s growth rates, guidance and valuations to find out.

Image source: Microsoft.

It’s still firing on all cylinders

Microsoft divides its sprawling business into three segments: productivity and business process (31% of its revenue in the second quarter), intelligent cloud (35%) and more personal computing (34%). All three divisions continued their streak of double-digit revenue growth in the second quarter:

Revenue growth (YOY)

FISCAL YEAR 2021

Q1 2022

Q2 2022

Productivity and business process

16%

22%

19%

smart cloud

24%

31%

26%

More personal computing

12%

12%

15%

Total

18%

22%

20%

Source: Microsoft. YOY = year after year.

In the productivity and business process segment, Microsoft Commercial Office revenue grew 14% year-over-year. Dynamics grew 29%, while LinkedIn revenue grew 37%. The cloud-based components of Office and Dynamics have both grown much faster than their on-premises counterparts.

In the intelligent cloud segment, revenue from its server products and cloud services increased by 29%. Its revenue from Azure, which ranks second in the cloud infrastructure market after Amazon (NASDAQ:AMZN) Web services (AWS) and other cloud services grew 46%, marking only a slight deceleration from their 50% growth in the first quarter.

In the more personal computing segment, its Windows OEM revenue was up 25% year-over-year, its Windows retail revenue was up 13%, and its Xbox revenue was up 10%, even as the broader gaming market was facing a post-lockdown slowdown and supply chain disruptions. . Its search and news ad revenue increased 32% after excluding traffic acquisition costs.

Microsoft expects its total revenue to grow 16% to 18% year over year in the third quarter. Analysts expect its revenue to grow 17% for the full year. He does not expect his current acquisition to ActivisionBlizzard (NASDAQ: ATVI)which will increase the size of its Xbox business, to close through fiscal year 2023.

Its cloud business continues to grow

Microsoft’s total cloud revenue, which includes all of its three divisions’ cloud-facing businesses, grew 32% year-over-year to $22.1 billion, or 43% of revenue of the company. That was only a slight slowdown from its 36% cloud revenue growth in the first quarter.

Azure, the most watched component of its cloud business, claimed 21% of the global cloud infrastructure market in Q3 2021, according to Canalys. AWS accounted for 32% of the market. However, Azure’s market share has steadily increased over the past two years while AWS’s share has been declining:

Market share

Q3 2019

Q3 2020

Q3 2021

Azure blue

17%

19%

21%

AWS

33%

32%

32%

Source: Canalys.

This expansion strongly suggests that many companies, especially retailers who don’t want to support Amazon’s most profitable business, will likely continue to choose Azure over AWS.

Its operating margins are still healthy

Microsoft posted an operating margin of 43% in the second quarter of 2022, which fell from 44.7% in the first quarter, but still marked a significant expansion from 41.5% in the year-ago quarter.

This year-over-year expansion is impressive, given that Microsoft significantly increased its workforce and ramped up investment in its cloud engineering, sales, customer deployment, games, and LinkedIn segments over the course of the year. past year. It also expects its operating margins to increase “slightly” for the full year, while analysts expect its earnings per share to rise around 15%.

Those healthy margins allowed Microsoft to return $10.9 billion (more than 100% of its free cash flow) to its investors through buybacks and dividends in the second quarter, a 9% increase over in the quarter of the previous year.

But is Microsoft worth its premium valuation?

It’s hard to find fault with Microsoft’s latest earnings report. However, the stock still trades at 32 times forward earnings, which is arguably a high multiple for a company expected to deliver mid-teens percentage earnings growth for the foreseeable future.

But in this tough market, I think Microsoft’s growth justifies this slight premium. It generates stable revenue and earnings growth, it has plenty of cash to deploy on buyouts, dividends and new investments, and its well-diversified business has weathered many economic downturns before. Therefore, I strongly believe that Microsoft is still worth buying – even if you missed the stock’s monstrous 360% gain over the past five years.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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