Tech stocks have been hammered this year, with the Federal Reserve increasing interest rates aggressively. The tech-heavy Nasdaq is down 29.3% year-to-date. This tech sell-off has led to many quality stocks, such as Microsoft Corporation (MSFT), trading at valuations much lower than their intrinsic values.
MSFT has declined 28.3% in price year-to-date and 19.3% over the past year to close the last trading session at $240.98.
The company missed the consensus earnings and revenue estimates in the last reported quarter. Its EPS came 2.7% below the consensus estimate of $2.29, while its revenue missed consensus estimates by 0.9%. The revenue miss was primarily attributed to the worsening foreign-exchange rates.
However, despite currency fluctuations, the company guided double-digit growth in its revenue and operating income for fiscal 2023. Wedbush analyst Dan Ives said that the forecast was “shockingly strong.”
MSFT has landed large long-term Azure deals. CEO Satya Nadella said, “We are seeing larger and longer-term commitments and a record number of $100 million-plus and $1 billion-plus deals this quarter.” “Coming out of this macroeconomic crisis, the public cloud will be even a bigger winner,” he added.
MSFT has announced a quarterly dividend of $0.68, payable on December 8, 2022. The upcoming dividend will reflect a 10% increase over the previous quarter’s dividend.
Its four-year average dividend yield is 1.08%, and its forward annual dividend of $2.72 translates to a 1.13% yield. The company has increased its dividend for 17 consecutive years. Its dividend has grown at a 10.5% CAGR over the past three years.
Here’s what could influence MSFT’s performance in the upcoming months:
Robust Financials
MSFT’s revenue increased 12.3% year-over-year to $51.86 billion for the fourth quarter ended June 30, 2022. The company’s net cash from operations increased 8.4% year-over-year to $24.63 billion. Its net income increased 1.7% year-over-year to $16.74 billion. In addition, its EPS came in at $2.23, representing an increase of 2.7% year-over-year.
Favorable Analyst Estimates
MSFT’s EPS for fiscal 2023 and 2024 is expected to increase 10.6% and 17.6% year-over-year to $10.19 and $11.98. Its revenue for fiscal 2023 and 2024 is expected to increase 11.2% and 14% year-over-year to $220.43 billion and $251.49 billion. It surpassed Street EPS estimates in three of the trailing four quarters.
Higher-than-industry Profitability
In terms of trailing-12-month gross profit margin, MSFT’s 68.40% is 37% higher than the 49.94% industry average. Likewise, its 49.42% trailing-12-month EBITDA margin is 284.2% higher than the industry average of 12.86%. Furthermore, the stock’s trailing-12-month Capex/Sales came in at 12.05%, compared to the industry average of 2.40%.
POWR Ratings Show Promise
MSFT has an overall rating of B, equating to a Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. MSFT has a B grade for Quality, in sync with its higher-than-industry profitability.
It has a B grade for Stability, consistent with its 0.94 beta. Also, its favorable analyst estimates justify its B grade for Sentiment.
MSFT is ranked #8 out of 54 stocks in the B-rated Software – Business industry. Click here to access MSFT’s Growth, Value, and Momentum.
Bottom Line
Despite the uncertain macroeconomic environment and fluctuating currency exchange rates, MSFT expects its revenue and operating income to grow in double digits in fiscal 2023. The company has also raised its dividend by around 10% over the previous quarter.
Given its robust financials, favorable analyst estimates, and higher-than-industry profitability, we think it could be wise to buy the stock now.
How Does Microsoft Corporation (MSFT) Stack Up Against its Peers?
MSFT has an overall POWR Rating of B, equating to a Buy. Check out these other stocks within the Software - Business industry with an A (Strong Buy) or B (Buy) rating: VMware, Inc. (VMW), Amdocs Limited (DOX), and Citrix Systems, Inc. (CTXS).
MSFT shares were trading at $237.04 per share on Friday afternoon, down $3.94 (-1.63%). Year-to-date, MSFT has declined -29.06%, versus a -22.00% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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