Microsoft Stock: back to a strong growth winner (NASDAQ: MSFT)

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Imagine the perfect stock. To write the perfect script, it would probably go something like this: it’s a leading global player in several technology sectors, including software, cloud computing, gaming, and social media. It has shown strong year-over-year revenue growth and growing profits at a CAGR of 54% over the past three years. It also generates over $50 billion in free cash flow and has negative net debt, and to top it off, it is expected to continue growing.

The above stats are all taken from the Microsoft Q2 FY 2022 release.

Here at the Mare Evidence Lab, we are primarily value investors, but that doesn’t mean we don’t like growing companies. If we buy the hype, we want to see a solid justification. Our growth investment thesis considers the following points:

  1. That stock prices will follow corporate earnings over the long term
  2. Companies able to steadily increase their profits with good visibility
  3. Low to no negative news flow

Back to Microsoft (MSFT), which recently released its second quarter results, the key here is Azure, the company’s cloud computing service. Microsoft shares fell on release despite higher earnings estimates, due to Azure growing slightly below consensus at (just!) 46% year-over-year. The company, however, expects Azure’s growth to accelerate in the coming quarters, driven by “Strong commercial execution, represented by strong reservations growth driven by long-term Azure commitments”, on the earnings call, the company gave updated guidance on Azure and the stock recouped the initial decline. After reviewing the competition for cloud computing, Azure remains one of our top two picks along with Alphabet’s GCP with the best growth prospects in the current market environment. Due to the nature of cloud contracts (over $100 million) and the continued digitization of the industry, we remain confident of Azure’s medium-term growth prospects.

Microsoft segment revenue growth

Microsoft segment revenue growth (Microsoft)

Microsoft’s foray into social media has been through LinkedIn buying and keeping its nose clean of controversy unlike other social media platforms, however, it has proven to be an incredibly strategic asset to others. reasons. With the COVID 19 pandemic driving a workplace revolution, LinkedIn has generated record numbers. We looked at some of the stats the group released with its 2021 annual report. the first time in its history. Not only that, but the user base has also grown to 774 million members and engagement has also increased, with sessions up 30% in 2021 compared to the previous year.

Microsoft made financial headlines this past quarter when it announced plans to buy Activision Blizzard, which we covered in this article last month. As we mentioned at the time, we see no reason for the deal not to materialize, and once completed, Microsoft would become a veritable colossus in the gaming industry, becoming the only real competitor to the two. dominant Asian companies, Tencent and Sony. .

Other tailwinds for Microsoft this past quarter were: personal computing growth with Windows OEM revenue up 25%, in the upper range of expectations; and also cash returns to shareholders, with a $60 billion share buyback program announced in September last year and an increase in the quarterly dividend from the previous year to 62 cents per share (+ 11%).

Risks for Microsoft include the political risks of using industrial data as governments become increasingly protectionist. This could have a potential negative impact on its Azure line of business. While we don’t see any direct negative effect on the stock, we also see the current macroeconomic situation with rising interest rates as a headwind for the tech sector in general. Other more general risks include currency and inflation risks.


Microsoft is by no means cheap in terms of valuation, but as we mentioned at the start of this article, stock prices will follow earnings, and we see clear visibility into the company’s earnings direction. We value Microsoft with a forward P/E 22 of 31.5x using conservative estimates and price the stock with a buy and target price of $360 per share, implying a current upside of 24%. We recommend buying on current market weakness to maximize stock returns.

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