Microsoft Stock: Enjoying strong support from Wall Street


I am neutral on Microsoft (MSFT) because Wall Street’s strong support and the company’s competitive strengths are offset by its high valuation.

Microsoft is a leading US technology company that provides consumer electronics, computer software, and other related services. The company was founded by childhood friends Bill Gates and Paul Allen. (See Best Analyst Stocks on TipRanks)

Strengths

Microsoft is best known for making one of the world’s leading operating systems, Microsoft Windows, as well as products like Internet Explorer, the Microsoft Office suite, and Edge web browsers. The company sells flagship products such as Xbox game consoles and Microsoft Surface touchscreen computers.

In October, Microsoft overtook Apple’s (AAPL) market capitalization to become the world’s most valuable public company. It was the world’s largest software maker by revenue in 2016 and one of the top five companies in the United States.

Recent results

Microsoft reported revenue of $ 45.3 billion and GAAP net income of $ 20.5 billion in the first quarter of 2022. The report showed 22% year-over-year revenue growth. other and 48% growth in net profit. The company also reported operating profit of $ 20.2 billion, which highlighted a 27% increase.

Diluted earnings were $ 2.71 per share (GAAP), an increase of 49% and $ 2.27 per share (non-GAAP), an increase of 25%. Microsoft also received net tax benefits of $ 3.3 billion.

The company posted strong performance in its Commercial Products, Cloud and Server divisions in the first quarter of 2022. Demand for Microsoft 365 increased, resulting in a 12% year-over-year increase in commercial products and cloud services revenues. . The company’s surface revenues were down 17% and the company attributed the decline to a stronger previous year.

Hardware revenue improved 166%, driven by continued demand for Microsoft Xbox Series X and S consoles. Overall gaming revenue was $ 3.6 billion for the quarter, an increase of 16% and a record first quarter for the company.

However, its revenue from Xbox content and services only grew slightly by 2%. The company claims to have seen some growth in Game Pass subscriptions, but did not disclose the exact number of subscribers during the quarter.

The company has shown impressive growth in its cloud services with smart cloud revenue up 31% from the first quarter of 2021, including Azure and other cloud services showing growth of 50%. Office also performed well with consumer products and cloud services, showing a 10% increase and a total of 54.1 million Microsoft 365 consumer subscribers, an increase of 19%.

Office Business products and cloud services saw revenue increase 18% year-over-year, with Office 365 commercial revenue increasing 23%. Revenue from commercial desktop products also fell 13% from a year ago, indicating a shift to cloud services.

Assessment measures

Microsoft’s stock currently looks highly valued, as the EV / EBITDA multiple of 24.1x is well above its five-year average of 17.1x, and its forward P / E multiple of 35.3x is also much higher. at its five-year average of 27.4x. .

The company also has fairly solid growth prospects with EBITDA expected to grow 19% in 2022 and 15.5% in 2023.

The Taking of Wall Street

From Wall Street analysts, Microsoft is getting a strong buy analyst consensus based on 23 buy ratings, one hold rating, and no sell ratings in the past three months. Microsoft’s average price target of $ 368.23 places the upside potential at 14%.

Summary and conclusions

Microsoft is a leading global technology company and the largest company in the world by current market capitalization.

It attracts some of the best and brightest minds in the tech space and its stellar track record enables it to invest in new product development to maintain its competitive edge. The company is also benefiting from almost unanimous bullish support from Wall Street analysts.

That said, the stock price looks a bit rich here after its last run, so investors may want to wait for a pullback before adding stocks.

Disclosure: At the time of publication, Samuel Smith does not have a position in any of the titles mentioned in this article.

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