Is Microsoft stock a buy or sell after recent earnings? (NASDAQ: MSFT)

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Summary in seconds

I always rate Microsoft Corporation (NASDAQ: MSFT) shares in the form of Hold. I previously reviewed MSFT’s financial results for the fourth quarter of fiscal 2021 (YE June 30) in my previous article published on August 2, 2021.

I focus on Microsoft Corporation’s most recent results for the second quarter of fiscal year 2022 and its key indicators in this final article. I come to the conclusion that MSFT shares are still stuck, even though it generated another beat in earnings in the last quarter. Microsoft Corporation’s current future P/E multiples in its 20s and 30s are supported by its high ROE, but a slowdown in its sales growth in the coming years will limit future expansion of valuation multiples.

How were Microsoft stock earnings?

Microsoft Corporation’s most recent results for the second quarter of fiscal 2022 were released on January 25, 2022 after market close. According to the company’s second quarter of fiscal 2022 10-Q rating, MSFT’s revenue and diluted earnings per share increased +20% and +22% year-on-year to $51,728 million and $2.48, respectively, in the latest quarter.

MSFT’s revenue and net income for the second quarter of fiscal 2022 were above what the market had expected prior to the earnings announcement. Microsoft Corporation’s second-quarter revenue was +1.9% higher than sell-side analyst consensus forecast of $50.79 billion, while the company’s earnings per share topped +6 .9% the market consensus net income estimate of $2.32 per share.

MSFT Share Price Performance Following Q2 Fiscal 2022 Earnings Announcement

MSFT

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Microsoft Corporation Stock Price Performance Year-to-Date 2022

Microsoft Corporation

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It’s no surprise that shares of Microsoft Corporation rose +6.9% and significantly outperformed the S&P 500 over the three trading days after posting better-than-expected quarterly results. But MSFT’s stock price is down another -8.3% and has slightly underperformed the S&P 500 in 2022 so far.

In the following section, I highlight a number of key metrics from Microsoft Corporation in the second quarter of fiscal 2022, which gives investors a better idea of ​​the company’s performance over the past quarter and its future prospects.

Key measures of MSFT actions

Despite MSFT’s earnings overshoot and stock price outperformance following the earnings release, I have a mixed view of Microsoft’s recent second-quarter financial performance and outlook after reviewing a few key metrics.

I’m positive about Microsoft’s gaming and Azure businesses.

According to his Q2 FY 2022 results presentation slides, MSFT’s games revenue was up +8% year-over-year in the second quarter of fiscal 2022, with its Xbox hardware revenue and Xbox content and services revenue up +4% and +10% in year-on-year, respectively in the last quarter. At the company Call for Q2 FY 2022 results, Microsoft Corporation noted that the gaming business performed well despite a “good comparable previous year which included the launch of the Xbox Series X and S”.

Notably, Microsoft Corporation also mentioned during the second quarter fiscal 2022 earnings briefing that Xbox content and services revenue growth would have been even stronger without the “weaker performance of third-party titles “. Earlier, MSFT announced plans to acquire Activision Blizzard, Inc. (NASDAQ: ATVI) in a press release issued on January 18, 2022. In the press release, Microsoft Corporation pointed out that ATVI owns “iconic franchises” such as “Warcraft, Diablo, Overwatch, Call of Duty, and Candy Crush”, and pointed out that the deal is expected to “accelerate the growth of Microsoft’s gaming business across mobile, PC, console, and cloud.”

I am impressed with the performance of MSFT’s gaming business in the second quarter of fiscal 2022 despite a strong base in the second quarter of fiscal 2021, and I expect the gaming business to still do better in the future, taking advantage of the ATVI transaction.

Microsoft Corporation’s Azure revenue growth is another key metric to watch. Azure saw an excellent +46% year-over-year revenue growth in the second quarter of fiscal 2022, despite a slight slowdown from +48% in the third quarter of fiscal 2022 according to its presentation of the results of the second trimester. More importantly, MSFT indicated on its second quarter fiscal 2022 earnings call that it expects Azure’s “revenue growth” for the third quarter of fiscal 2022 “to increase sequentially in constant currency”. Microsoft Corporation added during the recent quarterly earnings briefing that Azure represents a “long-term commitment” for “customers” who “choose a partner to help them change the cost structure.”

In my previous August 2, 2021 article for MSFT, I pointed out that “Azure is a very important part of Microsoft’s growth story”, and that consistent Azure revenue growth will serve as “validation strong customer demand for (Microsoft’s) cloud computing services.” As such, it is very encouraging to see that Azure sales growth remained robust in the second quarter of fiscal 2022, as well as the fact that management expects this positive growth momentum for Azure continues in the next quarter.

On the other hand, I’m concerned about the sustainability of Windows OEM revenue growth, weaker-than-expected profitability forecasts, and currency headwinds.

A key driver of Microsoft Corporation’s fiscal 2022 second-quarter revenue and profit growth was the +25% year-over-year jump in Windows OEM revenue, which looks unsustainable going forward. The company’s year-over-year increase in Windows OEM revenue was +10% yoy and +1% yoy for the first quarter of fiscal 2022 and the second quarter of fiscal 2021, respectively . MSFT acknowledged on the second quarter FY2022 investor call that this was “significantly ahead of expectations, driven by the strong PC market” and “6 points of positive impact from the deferral of revenue from $210 million related to Windows 11”. It’s no surprise that MSFT guided a more modest “single-digit” increase in Windows OEM revenue for the third quarter of fiscal 2022.

Separately, according to the company’s outlook presentation for the third quarter of fiscal year 2022, Microsoft Corporation expects to record $13.4 billion to $13.5 billion in operating costs for the third quarter of the year. current exercise. This translates to an operating profit margin of 40.6% (based on the midpoint of management guidance) for MSFT in the third quarter of fiscal 2022, approximately -30 basis points lower (based on S&P Capital IQ data) than Wall Street’s consensus third-quarter operating margin forecast ahead of the recent quarterly earnings announcement. Additionally, Microsoft Corporation’s operating profit margin was higher at 43.0% for the second quarter of fiscal 2022. In other words, MSFT expects a lower operating profit margin on a quarterly basis than third quarter of fiscal 2021, and this is also slightly below market expectations.

Currency headwinds are another concern of mine. MSFT noted in its presentation of the outlook for the third quarter of fiscal 2022 that negative currency effects (in particular the strength of the US dollar) could cause a decrease of “2 points” in “total revenue growth”. Microsoft Corporation also disclosed on its second-quarter fiscal 2022 earnings call that currency fluctuations have already led to “a one-point headwind” for the company’s revenue expansion. business over the last quarter “against expectations”.

In summary, after analyzing some key metrics, I believe that MSFT’s second quarter fiscal 2022 results weren’t as good as they appear. More importantly, I believe there is a risk of earnings loss for MSFT in the third quarter of fiscal 2022 due to slower-than-expected Windows OEM revenue growth, weaker-than-expected profitability and currency headwinds.

What is the Microsoft Stock forecast?

Looking beyond the recent second quarter, I assess Microsoft Corporation’s medium-term financial guidance to see if it supports MSFT’s current valuations.

According to financial estimates from S&P Capital IQMSFT is expected to generate relatively high annual ROE between 31% and 41% between fiscal years 2022 and 2026. In terms of revenue growth, Microsoft Corporation is expected to expand the company’s revenue by a CAGR of + 14.4% for the 2022 financial year – 2026 period.

Microsoft Corporation is currently market-valued at normalized P/E multiples for fiscal 2022 and fiscal 2023 of 32.9 times and 28.8 times, respectively, according to S&P Capital IQ data and based on its last stock price of $308.26 as of January 28, 2022.

In my view, MSFT’s current valuations seem fair. Its forward P/E multiples in the low 20-30 range are justified by its high forward ROE. But the company’s revenue growth is expected to slow from +18% in fiscal year 2021 to mid-1920s percentage in the medium term (fiscal year 2022-2026), indicating that a substantial increase in the valuation multiple of his actions is less likely.

Is the MSFT stock a buy, sell or hold?

I see the MSFT stock as an expectation. In the near term, Microsoft Corporation may miss consensus earnings expectations for the third quarter of fiscal 2022, as I explained earlier. In the medium term, a moderation in MSFT’s revenue growth in the coming years suggests Microsoft’s valuations are fair, but may have already peaked.

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