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Microsoft Stock: Enjoying Strong Backing from Wall Street
Stock Analysis & Ideas

Microsoft Stock: Enjoying Strong Backing from Wall Street

I am neutral on Microsoft (MSFT) as the company’s strong backing from Wall Street and competitive strengths are offset by its elevated valuation.

Microsoft is a leading American technology corporation that provides consumer electronics, computer software and other related services. The company was started by childhood friends Bill Gates and Paul Allen. (See Analysts’ Top Stocks on TipRanks)

Strengths

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

In October, Microsoft passed Apple’s (AAPL) market capitalization to become the most valuable public company in the world. It was the world’s biggest software manufacturer by revenue as of 2016, and is one of the Big Five companies in the United States.

Recent Results

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

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

The company saw strong performance in its Commercial Products, Cloud and Server divisions in the first quarter of 2022. It saw increased demand for Microsoft 365, which resulted in revenue increases in the Commercial Products and Cloud services by 12% year-over-year. The company’s surface revenue saw a decrease of 17% and the company attributed the decrease to a stronger prior year.

Hardware revenue saw an improvement of 166%, thanks to the continued demand for Microsoft Xbox Series X and S consoles. The overall Gaming revenue was $3.6 billion for the quarter, showing an increase by 16%, and a record first quarter for the company.

However, its Xbox Content and Services revenue saw only a slight growth of 2%. The company says it has seen some growth in Game Pass subscriptions but did not reveal the exact number of subscribers in the quarter.

The company showed impressive growth in its Cloud Services with revenue in intelligent cloud up 31% from the first quarter of 2021, including Azure and other cloud services showing a growth of 50%. Office also saw strong results with the Consumer products and Cloud services, showing an increase of 10% and a total of 54.1 million Microsoft 365 consumer subscribers, showing an increase of 19%.

Office Business Products and Cloud Services saw an increase of 18% revenue year-over-year with the commercial revenue of Office 365 up by 23%. Office Commercial Product revenue also dipped 13% from the previous year, indicating a transition to cloud services.

Valuation Metrics

Microsoft’s stock looks richly valued right now 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 well above its five-year average of 27.4x.

The company also has a pretty strong growth outlook with EBITDA expected to grow by 19% in 2022 and 15.5% in 2023.

Wall Street’s Take

From Wall Street analysts, Microsoft earns a Strong Buy analyst consensus based on 23 Buy ratings, one Hold rating, and zero Sell ratings in the past three months. The average Microsoft price target of $368.23 puts the upside potential at 14%.

Summary and Conclusions

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

It attracts some of the best and brightest minds in the technology space and its stellar balance sheet enables it to invest in developing new products in order to maintain its competitive advantage. The company also enjoys near unanimous bullish backing from Wall Street analysts.

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

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

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates  Read full disclaimer >

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