Microsoft (MSFT) needs no introduction, with most consumers and investors alike relatively familiar with the company’s diverse operations. Microsoft is currently the second-highest valued company in the world, sporting a market cap of $2.3 trillion, only behind Apple (AAPL).
The company’s latest results marked another period of excellent performance, and while shares are not cheaply valued, it seems that Microsoft stock is well worth it at its current levels.
Further, the company’s acquisition of Activision Blizzard (ATVI) should unlock great synergies in Microsoft’s gaming division in terms of title exclusivity, while being accretive to Microsoft’s earnings. I am bullish on the stock.
Latest Results
Microsoft’s Q2-2022 results came in quite strong, with revenues and diluted EPS growing by 20% and 22% year-over-year to $51.7 billion and $2.48, respectively.
Specifically, revenues from Productivity and Business Processes came in at $15.9 billion, implying 19% year-over-year growth, powered by Office 365 Commercial experiencing revenue growth of 19%, and LinkedIn revenues growing 37%. Overall it’s quite impressive to see how such a mature division continues to grow at a double-digit pace, especially when it comes to Office.
The more impressive numbers were in Microsoft’s Intelligent Cloud revenues, which were $18.3 billion, suggesting an increase of 26%, driven by server products and cloud services growing by 29%, and Azure and other cloud services growing by around 46%.
Azure and cloud services, in general, are one of Microsoft’s highest-margin cash flow sources. Hence, the company is likely to experience a notable margin expansion moving forward as Azure grows as a larger chunk of revenues over time.
Microsoft’s growing margins and profitability prospects are already quite visible, with operating income reaching $22.2 billion, an increase of 24%, and net income reaching $18.8 billion, an increase of 21%. Following the company’s stock repurchases which further contribute to EPS growth, EPS grew by 22%, as mentioned earlier.
Speaking of stock repurchases, the company returned $10.9 billion to shareholders in the form of share repurchases and dividends in Q2 2022 alone, implying an increase of 9% versus the comparable period last year.
The Activision Blizzard Acquisition
A little over two weeks ago, Microsoft announced a deal to acquire Activision Blizzard in an all-cash transaction valued at $68.7 billion. The deal is expected to close in Fiscal Year 2023, which begins in July in Microsoft’s case.
In my view, the acquisition makes total sense for Microsoft, as it will be immediately accretive to its adjusted net income, as management has mentioned.
Through Activision Blizzard, Microsoft gets fantastic IP from several franchises, including Call of Duty, World of Warcraft, Overwatch, Diablo, and Candy Crush, to add to its gaming portfolio. I also think that Microsoft will benefit from keeping some titles exclusive to itself, posing higher competition for Sony’s Playstation.
Wall Street’s Take
Turning to Wall Street, Microsoft has a Strong Buy consensus rating, based on 29 unanimous Buys assigned in the past three months. At $375.22, the average Microsft price target implies 22.8% upside potential.
Conclusion
In my view, Microsoft is one of the safest stocks to own in a growth portfolio. The company’s diverse operations keep growing across the board at an impressive pace, and assuming the acquisition of Activision Blizzard closes successfully, the company’s gaming portfolio will be significantly expanded.
The stock may not trade at a discount considering its forward P/E of around 33. However, considering its overall qualities, moat, and growth consistency, I believe that shares are quite reasonably valued.
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