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Shares of Microsoft (MSFT) have gained 34% year-to-date, which sounds quite exceptional - until you compare the stock's performance to some of its mega-cap tech peers. MSFT's returns this year have trailed the broader Nasdaq QQQ Invesco ETF (QQQ), which has gained nearly 38% in 2023, as well as all five FAANG stocks. Within that group, Apple (AAPL) is up 37.5%, Netflix (NFLX) has gained 43.8%, Alphabet (GOOGL) has rallied 46.5%, Amazon (AMZN) is 65% higher, and Meta Platforms (META) leads the group with its 151% breakout.
However, a sudden uptick in macroeconomic concerns - including high-profile downgrades from Fitch and Moody's, alongside soft economic data out of China - has applied pressure to nearly all of the stock market's recent momentum leaders. In the case of Microsoft, that means the stock is now down 12% from its 52-week high of $366.78, set less than a month ago on July 18.
So, is now a good time to pick up shares of this non-FAANG tech giant at a relative bargain? Let's see how the software behemoth performed in the latest quarter, and whether investors should scoop up MSFT stock at its current valuation.
Is Microsoft Stock a Buy, Sell, or Hold?
Microsoft reported revenue of $56.2 billion in fiscal Q4 of 2023 (ended in June), an increase of 8% year over year, while adjusted net income surged 20% to $2.69 per share. Microsoft beat revenue and earnings estimates of $55.4 billion and $2.55 per share, respectively, but investors eyed the company's slowing cloud sales in recent quarters.
Microsoft's intelligent-cloud vertical sales rose 26% year over year in Q4, but top-line growth has decelerated in the past few quarters due to lower enterprise spending amid a challenging macro environment.
The cloud computing business has been a critical growth driver for Microsoft in the past decade. During the earnings call, management confirmed Microsoft Cloud revenue surpassed $110 billion in annual sales, rising 27% year over year. Comparatively, Azure - the intelligent cloud segment - accounted for more than 50% of total cloud sales for the first time in fiscal 2023. More broadly, industry estimates suggest the cloud computing market could expand to $2.4 trillion by 2030, providing Microsoft enough upside to drive its top-line results higher over time.
Microsoft enjoys a leadership position across several segments, including cloud, gaming, artificial intelligence, and enterprise services. Despite an inflationary environment, the company's economic moat allowed it to increase gross profits by 10% to $39 billion, and operating profits by 14.3% to $24 billion, indicating an operating margin of 43%.
Microsoft and AI
One long-term tailwind for MSFT stock will be artificial intelligence, or AI. Microsoft was an early mover in AI via its multi-billion dollar investment in ChatGPT's OpenAI. Further, a research report from Mordor Intelligence suggests the cloud-based AI market to touch $207 billion in 2028, up from $51 billion in 2023, indicating annual growth rates of 32%.
Thousands of companies globally are looking to leverage AI and build machine learning capabilities, suggesting widespread demand for Microsoft's products. During the Q4 earnings call, CEO Satya Nadella explained, "We have great momentum across Azure OpenAI Service. More than 11,000 organizations across industries, including IKEA, Volvo Group, Zurich Insurance, and digital natives like Flipkart, Humane, Kahoot, Miro, Typeface, use the service."
Already, the AzureAI business onboarded 100 customers daily in fiscal Q4.
What is the Target Price for MSFT Stock?
With a market cap of $2.4 trillion, Microsoft's adjusted earnings are forecast to rise from $9.81 per share in 2023 to $10.85 per share in 2024, and $12.35 in 2025. The stock is priced at 10.2x forward sales and 29.5x forward earnings, which is relatively steep.
Out of the 39 analysts tracking Microsoft stock, 29 recommend a "strong buy," three recommend a "moderate buy," two recommend "hold," and one recommends a “strong sell." The average price target for MSFT stock is $384.42, which is 19% above the current trading price.
Looking ahead, Microsoft is expected to report accelerating revenue growth in each of the next three years. Moreover, while the AI megatrend is still in its infancy, it can potentially allow Microsoft to generate billions of dollars in sales by 2030.
Additionally, Microsoft continues to invest heavily in research and development, which should allow it to expand its portfolio of innovative products and solutions. In Q4, its R&D expenses stood at $6.7 billion, representing about 12% of total revenue.
Despite recent volatility, the company's strong market share, robust customer base, and promising growth prospects make MSFT an appealing stock to buy on the dip.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
