Key points to remember

• Microsoft is partnering with Meta to offer what is called the “virtual desktop of the future”.
• Microsoft held a launch event where they unveiled various new products including an AI-based graphic design application, which indicates that the company is investing in the field of artificial intelligence.
• Microsoft continues to generate revenue from a variety of streams, ranging from enterprise communications platforms to cloud-based security.

Microsoft has been in the news lately as the company announced deals with other tech giants like Meta and Apple. Even though fears of runaway inflation have impacted the stock market throughout 2022, Microsoft recently saw its stock price rise based on positive news and launches — like an aging hip-hop star. hop finding new audiences sampled on the trail of a younger artist.

Microsoft made waves with the new partnership with Meta to bring its products to the virtual reality space, among new product launches.

We’ll be looking at all the recent news with Microsoft that you should know about if you’re considering investing in this company, as there’s been a lot going on lately.

What’s going on with Microsoft stocks?

A few things happening with Microsoft that investors are talking about.

Microsoft increased its dividend

On September 20, Microsoft announced that the board had declared a quarterly dividend of $0.68 per share, an increase of about 10% over the previous quarter’s dividend. This should make the stock more attractive to income investors looking for strong companies. The company generates a lot of cash and earnings should easily cover distributions. Dividend investing is ideal if you are looking to fight inflation and smooth out your exposure to volatility.

Microsoft continues to invest in cloud technology.

Microsoft continues to invest in the cloud space, where it competes with Amazon. Global digital transformation helps the company to increase revenue. Intelligent Cloud revenue was $20.9 billion for the quarter ending July 30, 2022. Intelligent Cloud’s business segment includes Azure (public cloud for hosting applications), SQL Server, Windows Server and enterprise services.

Microsoft Teams is growing

Microsoft Teams has grown to 270 million monthly active users, which means it has surpassed popular platform Slack, which has only around 18 million active users. Teams is now the most popular business communication platform in the world. The application is available in 181 countries and 44 different languages.

What you need to know about the Meta-Microsoft partnership

Microsoft CEO Satya Nadella recently appeared at the Meta Connect 2022 conference. Microsoft and Meta recently announced their partnership. Microsoft’s enterprise applications will be integrated into Meta’s Horizon virtual desktop environment.

Here are some of the highlights of this Meta-Microsoft partnership:

• Mesh for Microsoft Teams will be coming to Meta Quest devices. This will allow people to connect and collaborate as if they were working in person.
• Microsoft 365 Apps will be available on Meta Quest devices. This would allow users to access applications such as Word, Excel and Outlook in virtual spaces.
• Microsoft Intune and Azure Active Directory will support Meta Quest Pro and Meta Quest 2. This would give users the security and management control they get from virtual reality PCs.
• The two companies are also still working on ways to bring Xbox cloud gaming to the Meta Quest Store. This feature would allow gamers to stream Xbox games to phones, tablets, and the Meta Quest platform.

Meta CEO Mark Zuckerberg believes Meta’s virtual reality platform will be the virtual office of the future. The point is to share and collaborate with others as if you were together in real life, according to Nadella. This partnership is a vote of confidence from Microsoft, as many investors soured on Meta in 2022.

TryqAbout the Emerging Technology Kit | Q.ai – a Forbes company

Microsoft Surface Event

Microsoft unveiled the Surface Laptop 5 at its annual launch event on October 12, 2022. The laptop officially goes on sale today, October 25. Many reviewers weren’t thrilled with recent Surface news; some even think that the company has given up on innovative features, as the new model resembles its predecessor.

Microsoft ended up rolling out three major new products at the event: the Surface Pro 9, Surface Laptop 5, and Surface Studio 2+ all-in-one computer. The company also announced that it will add iCloud Photos to Windows 11 and Apple Music to Xbox.

While the company announced various new creativity and productivity tools for users, the only notable product was the AI-powered graphic design app that lets you generate any image you can imagine. Microsoft Designer will use the same AI technology found in DALL-E 2 to let you create unique images, digital postcards and more. With the Designer app coming to Microsoft Edge, users can create social media content from their browsers.

What’s next for Microsoft stocks?

It’s hard to know for sure what we can expect from the stock market in 2022 because of all the volatility this year has brought us – from the war in Ukraine to soaring inflation that can’t be contained.

Here are some fascinating things to consider when deciding whether to invest in Microsoft stocks.

Inflation continues to soar and cause stock market volatility

The US Bureau of Labor Statistics reported September inflation data on October 13, causing many tech stocks to tumble the next day. As the consumer price index (the CPI is the generally accepted measure of inflation) hit 8.2% in September, many pundits feared this could lead to further hikes in interest rates. interest from the Fed and increased uncertainty in the stock market. The biggest concern with the lingering inflation numbers is that further rate hikes could officially tip the economy into a recession.

It should be noted that Microsoft stock closed on October 13 at $228.56, then Monday morning it was up 4% at times, hovering around the $238 mark until it finally closed the day at $237.53. So, despite everything we just mentioned about inflation, Microsoft has been doing well recently. We’ll see how they hold up to future rate hikes, but the stock closed at $247.25 yesterday, up 2.12% on the day.

Microsoft’s acquisition of Activision Blizzard will generate more revenue

Many pundits hope that Microsoft’s acquisition of Activision Blizzard will materialize in 2023, despite current regulatory delays. This deal is believed to add around 400 million new gamers into Microsoft’s orbit. The UK Competition and Markets Authority is currently investigating the acquisition to ensure it does not harm competition; there are fears that Microsoft will pull “Call of Duty” from Sony. If the deal goes through, Microsoft will own popular games like “Call of Duty,” “Candy Crush,” and “World of Warcraft.” We’ll be watching to see how this transaction plays out, as the $68.7 billion acquisition would be a game-changer.

Microsoft launches new products

We’ve already mentioned Microsoft’s partnership with Meta, which made headlines, but the company has other new projects that could be lucrative soon. The most notable new product is Microsoft Cloud for Sovereignty, which is designed to meet the cloud needs of governments and the public sector. This product should be particularly useful in Europe when it comes to helping countries achieve their digital transformations. A Microsoft executive recently mentioned the number of companies accelerating their digital transformations with cloud-based services due to the European energy crisis.

Stock analysts say Microsoft stock is a buy

Michael Turrin of Wells Fargo
WFC
gives Microsoft a price target of $315, while Greg Moskowitz plans to buy the stock with a target of $320. Many analysts believe that Microsoft is well positioned in today’s market with multiple revenue streams that continue to grow as the focus on enterprise communications and cloud-based software continues to grow. Some experts have also pointed out how the profit margin is improving due to scaling measures and operating leverage.

All eyes will be on Microsoft’s next earnings report announcement on October 25. We will see what kind of growth Microsoft has had in its various applications like the Microsoft 365 suite, Dynamics and Power Platform. Microsoft also expects significant revenue growth from Surface as consumers seek out premium devices.

How should you invest?

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The bottom line

Companies like Microsoft will continue to do well with cloud-based services as the world continues its digital transformation. Microsoft has a wide variety of revenue streams that will bring in money for the company. With many analysts calling Microsoft a buy, it’s definitely worth looking into.

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When will Microsoft release first quarter results?

Microsoft will release its first-quarter results after markets close on Tuesday, October 25. A conference call will be held at 2:30 p.m. PT.

Consensus on Microsoft’s first-quarter earnings

Wall Street expects Microsoft to post a 9.6% increase in revenue in the first quarter of its new fiscal year to $49.66 billion, down from its forecast range of $49.25 billion to $50.25. billion, and a 1.8% increase in diluted EPS to $2.31.

Overview of Microsoft’s first quarter results

Microsoft is expected to post the strongest earnings growth of any Big Tech this season, though at just 1.8%, that’s not much to cheer about.

Microsoft provides a range of business-critical services and products, such as cloud computing and software, and that should benefit the company this season, as demand here is expected to hold up better than on the consumer side. This is evidenced by the fact that revenue from Microsoft’s more consumer-oriented More Personal Computing arm is expected to decline year over year and be offset by strong growth from its other enterprise-facing units:

(Source: Bloomberg Q1 2023 estimates)

The company, which generates more than half of its sales outside the United States, will feel the impact of the strong dollar as sales are expected to grow by almost 15% at constant exchange rates.

More Personal Computing, which benefits from Xbox game consoles, Surface laptops, its Windows operating system and its search and advertising operations, is expected to see a 1.4% decline in revenue and a 5.7% drop in operating profit to $4.8 billion. We’ve already heard warnings from other tech companies, including semiconductor stocks, that demand for games and consumer electronics has stalled. The boom in business hardware demand at the height of remote working during the pandemic is also unfolding. This not only affects the demand for its hardware, but also impacts the number of people using its Windows system.

Productivity & Business Processes is home to its Office and Dynamic software suite as well as its recruitment-focused social media site LinkedIn. The software, which is mainly offered as lucrative licenses, remains essential for individuals and businesses and demand is expected to hold up better than other forms of software in the future. Forecasts suggest consumer office demand will continue to grow, but will be much slower on the business side. LinkedIn will also contribute to revenue growth as working conditions remain difficult. The global division is expected to post a 7.3% increase in revenue and a 5.2% increase in operating profit to $7.8 billion this quarter.

Intelligent Cloud remains the main contributor to both revenue growth and operating profit. The unit is expected to generate a 20% increase in revenue and a slightly faster 21% increase in operating profit this quarter to $8.7 billion. Azure, which underpins its cloud operations and is often watched closely by the markets, is expected to see an impressive 43% increase in revenue at constant currency and remains the brightest part of the business.

Microsoft said it aimed to deliver double-digit revenue growth and higher operating profit at constant currency this fiscal year when it set targets earlier in 2022, but that could be vulnerable given slower growth and multiple headwinds limiting progress in terms of results. Wall Street currently thinks it can pretty much deliver on its promise, with full-year revenue growth forecast of 10.8% and a 9.9% increase in operating profit.

What’s next for MSFT stocks?

Microsoft shares have rebounded since hitting a 34-month low just over a week ago, although the rally has already shown signs of running out of steam.

Trading volumes have been declining over the past week and the five-day average volume is both 25% below the 10-, 20- and 30-day averages, although we will likely see a spike on the day of the results and following the update as we have seen in the past. We could see the stock back towards the $225 mark, in line with the March 2021 low, if it remains under pressure and the 34-month low of $219 remains in play.

The stock briefly managed to climb back above the $239 resistance-turned-support level we saw in March 2021 before coming back under pressure. This is the first upside target for the stock before $241.50, the June low, comes back into view. From there, he can look at a sharper jump to retake the October high of $250 and then the 50 and 100 day moving averages are back. Notably, the 200-day moving average is currently in line with the June high at $275.

The 52 brokers that cover the stock believe there is even greater upside potential with an average target price of $323, although that price has been reduced by more than $346 in the past three months.

Turning to the weekly chart, we can see that Microsoft shares have been forming a series of lower highs and lower lows since peaking at all-time highs just under a year ago and this upward trend drop is still intact.

Take advantage of extended trading hours

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Earnings season is upon us again and after the market closes next Tuesday (October 25), Microsoft (MSFT) will release its results for the first quarter of fiscal 2023 (1QFY23).

Against the backdrop of moderating IT budget growth expectations, an unfavorable currency environment and a weak PC market, Morgan Stanley analyst Keith Weiss says it’s no surprise that Investors are concerned about the broader impact these items could have on Microsoft’s earnings and guidance.

“That said,” continued the 5-star analyst, “strong insights into business operations from our channel conversations and another set of robust Microsoft-specific results from our latest CIO survey bolster our confidence in Microsoft’s resilience across key secular growth areas, as well as positioning in defensive categories, both supporting demand for Microsoft solutions.

Weiss thinks investors will be happy to see Azure, the tech giant’s cloud service, achieve 43% cc growth in the quarter and a guideline of 30% high to 40% low. Despite the slowdown in overall IT spending, according to Weiss polls, even in the current macro environment, the migration of workloads to Azure has been “fairly sustainable.” Additionally, with cloud computing and digital transformation still among the “top priorities” for CIOs, this secular tailwind should make Microsoft “resilient” to the easing IT spending environment.

Elsewhere, with forecasts from Gartner and IDC suggesting further declines in PC shipments, the Windows OEM business is set to face headwinds in FY23. Likewise, the strong dollar spells bad news. on the currency front.

And while in the latest earnings call, Chief Financial Officer Amy Hood indicated that the company still expects “double-digit revenue and operating income growth in constant currency and US dollars,” Weiss thinks that given all the current issues, sustaining reported double-digit growth “seems difficult.”

As a result, the analyst’s new model now projects reported revenue growth of 8.1% (or 12.7% cc) and operating profit growth of 7.8% (or 15.6% cc). ).

Nevertheless, despite lowering short-term expectations, with a “long-term total return profile for teenagers and an attractive valuation”, Weiss still considers MSFT to be one of his “best ideas”.

As such, Weiss is sticking to an overweight (i.e. buy) rating, although the price target is lowered from $354 to $325. The implication for investors? Up approximately 38% from current levels. (To see Weiss’ track record, Click here)

Wall Street remains firmly in Microsoft’s corner; 3 Aside, the other 26 recent reviews are positive, making the consensus here a strong buy; passing through the average target of $320.73, the shares will appreciate by 35% over the next few months. (See Microsoft stock predictions on TipRanks)

To find great ideas for tech stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a recently launched tool that brings together all of TipRanks’ stock information.

Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The Content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

Thesis article

Microsoft (NASDAQ: MSFT) is a very high-quality company with tailwinds for growth that looks poised to deliver compelling long-term total returns from current levels. And yet, notorious short seller Hedgeye recently recommended Microsoft as compelling short idea. I don’t believe MSFT is a great short-term choice at current valuations, as I will discuss in this article, and I think shorting Microsoft might be a losing idea. Both from a valuation perspective and from a company quality perspective, there are much better short ideas available for those wishing to short individual stocks.

One of the highest quality companies in the world

I believe Microsoft can be described as an excellent quality company. This belief is based on several factors. The first is Microsoft’s excellent track record. As one of only two companies in the world, it has a AAA credit rating, the other being Johnson & Johnson (JNJ). In other words, the rating agencies believe that a default by Microsoft is less likely than a default by the US government, which shows the exceptionally low financial risks for Microsoft.

The company has a net cash position of $58 billion, as we can see in the excerpt above from Microsoft’s latest 10-K. This equates to about 4% of the company’s current market cap, which is a much stronger cash balance than most other companies.

Microsoft has plenty of other strengths besides that though. Its returns on capital and its margins are excellent, for example:

Microsoft’s net profit margin sits at a very high 37%, which has several advantages. First, it means Microsoft will make a lot of money from the incremental sales, which means growing the business is very profitable for investors over time. In addition, the very high profit margin protects Microsoft from slowdowns. If inflation (say, for employee compensation) were to hurt Microsoft’s profit margins by a few hundred basis points, the company could easily afford that. A company operating with low profit margins would see its net profits devastated in the same scenario.

Microsoft’s quality is also highlighted by its recession resilience. Many company products are essential to business and the way we live our lives, such as the Windows operating system and the Microsoft Office suite. Unsurprisingly, MSFT has seen its revenues remain very resilient in the face of past crises:

Since the company went public about 40 years ago, there has been virtually no drop in revenue. During the Great Recession and in 2016, revenues dipped slightly, but that was by far not enough to significantly threaten the company’s profitability. The company therefore also did not have to cut its dividend at this time, although it should be noted that its dividend yield is rather low, which makes MSFT far from a great income choice. Still, the resilience against recessions and other types of macroeconomic issues such as the pandemic is excellent for long-term holders, especially those looking for a choice to sleep well at night.

Last but not least, Microsoft has also put in place strong management. Its current CEO, Satya Nadella, has guided the company very well for years and has identified clear growth trends such as mobile and cloud computing.

Insiders own just over 6% of the company, and that amount has steadily increased over the years. This equates to approximately $100 billion that insiders have invested in the company, leading to strong alignment with other shareholders – so there is little risk of company executives pursuing strategies that will not create no value to business owners.

So Microsoft is a high quality company, but there are two other reasons why I think bypassing MSFT is far from a good idea here.

Microsoft has compelling growth prospects

First, the company is expected to see tremendous growth in business and even stronger growth in earnings per share over the next few years. As we’ve seen before, recessions have virtually no impact on Microsoft, so the current economic downturn doesn’t seem like much cause for concern. Over the long term, several macroeconomic trends are poised to lead to significant revenue gains for the company. Along with Azure, Microsoft is one of the world’s leading cloud computing companies. The cloud computing market is expected to grow at an annual rate of 16% between 2022 and 2028 according to this study. As one of the major players in this space, Microsoft is expected to get a significant share of the market opportunity to be created.

Its legacy Windows and Office businesses will see less growth, but will still see some growth. Price increases and some new customer additions, for example due to digitalization in developing countries, should enable a significant growth rate, although double-digit revenue gains are unlikely in these segments over the long term. . Microsoft’s gaming business isn’t yet too big relative to the company’s overall size, but continues to grow, and its pending acquisition of Activision Blizzard (ATVI) should further accelerate Microsoft’s growth potential. Microsoft in this space, thanks to MSFT’s access to a solid IP address and ATVIs. Talent.

Between these growth engines, Microsoft is expected to see double-digit revenue growth every year through 2030:

Of course, forecasting revenues in 5 or 8 years comes with considerable uncertainty. So let’s assume that actual growth will be barely half of that expected, even though Microsoft has a history of beating expectations – it has exceeded revenue estimates in 9 of the last 10 quarters. If revenue growth is only half as high as expected, this would translate to an annual growth rate of around 6%. It would still be far from bad. Earnings per share growth is expected to be higher, due to the impact of share buybacks. With Microsoft trading today at a low earnings multiple of 20, it can repurchase shares at a fairly significant rate.

Buybacks totaled $31 billion over the past year, or about 2% of the company’s market capitalization. However, the redemption amount has been steadily increasing, which is why I believe that future redemptions will be higher. But even with 2% of its shares repurchased per year, Microsoft’s earnings per share would likely grow at an 8% pace under the 6% revenue growth scenario.

So when we expect MSFT to massively underperform expectations and grow only half of forecast, even though MSFT has a track record better than expected, Microsoft is still expected to post high single-digit growth in earnings per share. Shorting unprofitable companies, or those with declining earnings, seems like a better idea to me than shorting highly profitable companies with good earnings growth prospects that can repurchase shares at a brisk pace.

Microsoft: the evaluation is not demanding

Last but not least, there’s one last reason why I think Microsoft is far from big shorts today. In fact, I think MSFT is suitable for a long investment at current prices.

The company’s valuation was quite high a year ago, but has come down to a very reasonable level lately:

At current prices, Microsoft is trading for a low earnings multiple of 20, while next year’s earnings multiple is even lower at just 19. This is, I believe, an inexpensive valuation for a company of high quality with compelling growth prospects. What’s more, very tellingly, this represents a sharp discount to how Microsoft has been valued over the past three and five years. In fact, its valuation could increase by almost 50% for the company to trade in line with the averages of the last 3 and 5 years. The median 10-year earnings multiple is lower, but still around 20% higher than the company’s current valuation. This suggests that now is a relatively good time to add shares of Microsoft. At the same time, with MSFT trading below the historical valuation norm today, the timing seems rather inappropriate to take a short position. Microsoft was trading at a historically high earnings multiple of 36 at the start of the year – that would have been a much better sell at the time. But stocks have fallen over 30% since then, and now they don’t look like good shorts at all, I believe.

Carry

Microsoft is a big company with compelling long-term growth prospects. At the same time, its current valuation is below the historically normal range today. So I think now is a bad time to take a short position in Microsoft stock, especially since it has proven to be very resilient in the face of past recessions.

Of course, every stock could go down during a continued market downturn. But if you want to speculate on it, shorting the indices might be a better idea. Alternatively, shorting unprofitable or highly leveraged companies could be a solid way to play a continued market downturn. But shorting one of the highest quality companies in the world when it’s trading at a steep discount to how it was valued doesn’t strike me as a good strategy – it could lose a lot of money. money to short sellers.

Thesis

Over the past 20 quarters, Microsoft (NASDAQ: MSFT) beat consensus analyst estimates — both in terms of revenue and earnings — 95% of the time. But arguably, few quarters have needed such an urgent pace as the upcoming Q1 FY 2023. After losing slightly less than 33% of equity value year-to-date, compared to a loss of around 25% for the S&P 500 (SPX), the feeling is very nervous for MSFT. Maybe down?

In this article, I discuss everything an investor needs to know about Microsoft’s upcoming first-quarter fiscal 2023 results, which are due Oct. 25 before market.

Revenue overview

According to data compiled by Seeking Alpha, as of October 12, 33 analysts have submitted their estimates for Microsoft’s first-quarter fiscal 2023 results. Total sales are expected to be between $48.67 billion and $51.44 billion, with the average estimate being $49.82 billion. The dispersion is therefore quite wide. If an investor takes the average as an anchor, Microsoft’s first-quarter sales are expected to grow about 9.9% from the same quarter in 2021. EPS estimates range between $2.25 and 2. $46. The average is $2.32, which would imply year over year. growth of only 2.1%.

Regarding MSFT’s earnings forecast, investors should note two key points: First, the earnings forecast only estimates year-over-year EPS growth of just over 2% , which is clearly disappointing in my opinion. And second, earnings expectations (EPS revisions) for the third quarter are down more than 10% from the respective January 2022 expectations.

Are the estimates too bearish?

Arguably, one of the main reasons why third quarter expectations are somewhat low is due to a very challenging macroeconomic environment – driven by inflation, rising interest rates, declining consumer confidence consumers and geopolitical tensions. And so, investors should note that whatever decline in the stock price is likely to be a function of the economy and not specific to Microsoft’s competitive moat, earnings growth and company profitability. company.

Smart Cloud – Loss of speed

To counter the negative impact of a slowdown, Microsoft has already announced slowing hiring, as well as potentially laying off existing employees. According to various news outlets, the downsizing primarily affects Microsoft’s cloud and security units.

This is surprising in my opinion, as the cloud – and in particular security – have been labeled as key growth areas for Microsoft. In fact, during the fourth quarter of fiscal 2022, management commented: (emphasis added)

In a dynamic environment, we saw strong demand, gained market share and increased customer engagement with our cloud platform. Commercial reservations increased 25% and Microsoft Cloud revenue reached $25 billion, up 28% year-over-year

Additionally, regarding security specifically, management told analysts:

As the rate and pace of threats continue to accelerate, safety is the top priority of every organization …

We take shares in all the major categories we serve. All up, our security revenue increased by 40% … We are the only cloud provider to protect all three major cloud platforms, and we see more and more customers turning to us to protect their multi-cloud and multi-platform infrastructure.

Has the environment changed so much since early June that the market is relying on outdated information? Maybe. Investors should consider how unexpected, fast-paced and vicious the environment has been for other blue chip companies such as Advanced Micro Devices (AMD), Amazon (AMZN) and Nike (NKE) – to say the least. name a few.

Reflecting on the above considerations, in my opinion, it is not unlikely that Microsoft’s main revenue driver – Intelligent Cloud, with around 45% of total sales – will disappoint in the first quarter of fiscal 2023.

personal computing

Microsoft’s personal computing division accounts for about a third of sales and includes Windows OEM products, Xbox content and services, search and news advertising, and Microsoft Surface.

The personal computing division already slowed in the fourth quarter of fiscal 2022, growing revenue only about 2% year-over-year to $14.4 billion. In addition, the September quarter marked a further slowdown in global PC demand – the biggest decline in demand in more than two decades.

Investors shouldn’t demand too much positivity here. But expectations are probably already very low.

Productivity and process

Reflecting on Microsoft’s September quarter, the key (open) question for me is “productivity and process” performance. A few months ago, Microsoft management commented that the segment is expected to grow between 12% and 14% in constant currency or $15.95 billion to $16.25 billion. And also added:

In Commercial Office, revenue growth will again be driven by Office 365 with seat growth across all customer segments and ARPU growth through E5. We expect Office 365 revenue growth to be approximately two points lower sequentially at constant currencies with a somewhat larger impact on US dollar growth than at the segment level.

While I understand that productivity gains and process optimization efforts must be essential for businesses in a tough economic environment, I doubt that businesses invest in these “optional” initiatives.

Personally, I think the lower estimate of the revenue guidance range ($15.95 billion) will be a more likely scenario.

other considerations

In Q4 2022, Microsoft returned $12.4 billion to shareholders in the form of share buybacks and dividends. But I think there could be a huge uptick in that number in Q1 2023 and/or in the future – given that Microsoft is a net creditor and generates about twice the cash flow from operations compared to which was distributed in fiscal year 4, 2022.

Microsoft’s business is firmly rooted in a subscription-based business model. As a result, the company’s revenue and cash flow are highly unlikely to fluctuate wildly from quarter to quarter. Note that in June 2023, Microsoft had approximately $43.5 billion in unearned revenue on the balance sheet.

Investors should consider that the risk may not relate to the last quarter of the first quarter of 2023, but the next quarters of the second quarter of 2023 and the third quarter of 2023, which could initially disappoint/surprise due to a weak market /strong. tips.

Conclusion

Heading into the September quarter earnings season, I’m less bullish on MSFT than I am on, for example, Meta (META) and Alphabet (GOOG) (GOOGL). I think Microsoft’s earnings estimate is reasonable – I just don’t think there will be a material upside surprise to sentiment.

Accordingly, I call the Microsoft stock a “Hold” entering earnings. But over the long term, I remain confident in the software giant’s earnings outlook. And there is no doubt that the company is undervalued.

Learn more about Microsoft: Is Microsoft Stock Cheap?

Bear markets are never fun. But savvy investors know that economic downturns, while painful, can give you a chance to build huge wealth in the stock market by buying stocks of great companies at deep discounts.

One of those great companies is Microsoft (NASDAQ: MSFT). Let’s take a closer look at the company (and the stock) to see if this tech leader presents such an opportunity right now.

The bullish case for Microsoft shares

Powerful global trends are driving Microsoft’s expansion. Businesses are digitizing their operations and moving them to the cloud, driving demand for the tech titan’s productivity software and cloud services. At the same time, billions of people around the world are turning to digital forms of entertainment, fueling the growth of Microsoft’s popular Xbox game console and streaming offerings.

Microsoft’s leadership has positioned the company – and its investors – to profit greatly from these trends. Since becoming CEO in 2014, Satya Nadella has prioritized mobile and cloud-based services, while minimizing traditional desktop software licenses. This decision turned out to be prescient. Microsoft is now positioning itself as a key enabler of the megatrend of digital transformation. And its long-term investors are wealthier for it, despite its recent share price decline.

Microsoft’s strong shareholder returns over the past five years have been driven by its strong financial results. The tech giant continues to generate an incredible amount of profit and cash flow, including $73 billion in net income and $65 billion in free cash flow over the past 12 months. This impressive cash flow has enabled Microsoft to reward its investors with bountiful stock buybacks and an ever-increasing stream of dividend income.

Data on MSFT share buybacks (quarterly) by YCharts.

Microsoft’s incredible cash flow generation and huge cash reserves – which topped $100 billion as of June 30 – also allow it to acquire other attractive growth companies. For example, Microsoft has reached an agreement to buy the video game leader ActivisionBlizzard for the colossal sum of $68.7 billion in January to further bolster its gaming business.

Risks for Investors to Consider

Fears of a potential recession are causing many companies to scale back their technology investments. Proof of this is Microsoft’s decelerating year-over-year revenue growth to 12% in its latest quarter, from 18% in the previous quarter and 21% a year ago. Still, the tech juggernaut’s diverse lines of business and fortress-like balance sheet should allow it to invest in its own operations throughout the current economic downturn. This, in turn, should further strengthen Microsoft’s competitive position against its smaller, less financially strong rivals.

However, a few select competitors can match Microsoft’s scale. Amazon (NASDAQ: AMZN) on the one hand, is actually the market leader in cloud computing services. Amazon Web Services (AWS) has a formidable presence in cloud infrastructure, with a 34% market share, according to Synergy Research Group. Microsoft’s Azure platform is second with a 21% share. This gap may narrow in the coming years as Azure grows at a faster rate than AWS. Still, it’s a battle investors should watch closely.

Apple (NASDAQ:AAPL) and Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) should not be overlooked either. Apple Macs and Google Chromebooks are gaining traction in the personal computer market. Macs hold a significant share of the high-end computer market, while Chromebooks are popular among cost-conscious buyers like schools and students. However, Microsoft’s Windows operating system still dominates the huge business desktop market, with a 76% market share.

Microsoft stock has a reasonable valuation

Like many tech stocks, Microsoft’s stock price is down sharply in 2022. After falling nearly 30%, its shares can now be held for about 23 times Wall Street’s earnings projections for this year and less than 20 times analysts’ estimates for next year. That’s a reasonable price to pay for a technological and financial goliath that is expected to grow its profits by more than 15% per year over the next half-decade.

Income-oriented investors will also appreciate Microsoft’s modest but rapidly growing dividend. Just days ago, its board approved a 10% increase in its quarterly cash payout, bringing its current yield to a respectable (for a tech growth stock) 1.2%.

So, is Microsoft stock a buy?

With its strong position within the megatrends of cloud, gaming, and digital transformation, Microsoft still has many years of growth ahead of it. Although strong rivals continue to pose challenges, the tech giant’s entrenched position and financial strength should enable it to hold off rivals in some markets and expand its presence in others.

Even better, long-term investors now have the option to start or add a position in this proven winner at a significantly reduced price. For all these reasons, Microsoft’s stock today looks like an attractive buy.

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Microsoft Corporation (NASDAQ: MSFT) just announced its annual dividend increase, as Seeking Alpha covered here. The new quarterly dividend of 68 cents per share represents nearly 10% dividend growth and marks the 13th consecutive year that Microsoft has announced a dividend increase in September.

Why is the month important, you may ask, as annual dividends increase year on year. We offer two reasons: (1) reliability on the part of the company; and (2) the ability to plan for reliability for income-seeking investors. Even those who cast a shadow over dividend growth stocks due to inflation may not have much to say about a double-digit increase.

Microsoft and even the world as a whole, you might say, have changed a lot since that article we wrote in 2014. But the fundamentals of investing in dividend growth haven’t changed. Therefore, this article uses the same model and compares how things look now versus eight years ago. Let’s start.

New Yield: New annual dividend of $2.72/share gives Microsoft a yield of 1.12%. That’s much less than the 2.66% after the 2014 dividend increase. No price to find the reason, though: the stock price has since increased almost 6 times, from $47 to $242. Even dividend enthusiasts wouldn’t complain about this price change, as Microsoft was stuck in a tight trading range for nearly a decade before breaking out thanks to its Azure dominance.

The payout ratio: Here is the kicker. Despite 8 more years of dividend increases since the 2014 article, Microsoft’s current term payout stands at 26% compared to his 46% in 2014. Add to that the stock price increase mentioned above, and you can clearly see the health of Microsoft’s earnings and the potential for dividend growth.

Dividend Growth Rate (DGR): At the time of our 2014 article, Microsoft’s 5-year dividend growth rate ranged between 10% and 25%. In contrast, the recent five-year range is much narrower between 9.52% and 10.87%. Why are we optimistic about this? This shows a more mature and reliable company when it comes to its dividends. To use a parallel with the world of running, runners enjoy what are called “tight gaps” for each mile, where the range of results is more predictable and leads to long-term success.

Extrapolation: To keep things consistent with the 2014 article, the table below assumes dividend growth of 10%/yr for the next 5 years and 7%/yr for years 6-10. This seems very cautious given the distribution margin, plus the expected double-digit earnings growth rate. It’s easy to scoff at this figure, but keep in mind that if the company realizes that it cannot use its profits and capital more productively, it will most likely increase the payout ratio. This means that the total return for investors should still be satisfactory given the combination of earnings growth and dividend growth.

Forward thinking

• A stock trading at the bottom of its 52-week trading range alone does not make it a buy. However, it offers a compelling story if the company’s fundamentals don’t deteriorate. No one can seriously say that Microsoft, the company, won’t be around for the next few years. Microsoft, the stock, has been inflated like almost every other stock in the market, but after falling from $350 to $240, Microsoft is trading at a multiple of 24. If you think that’s excessive, Procter & Gamble (PG) is trading at 23 and our beloved Coca-Cola (KO) is trading at 24. When inflation, unfortunate war, COVID and other macroeconomic conditions stabilize (they don’t even need to improve), stocks like Microsoft will catch early bids.
• You’re not to blame if you’re fed up with cloud growth stories. It has to stop at some point, you think. You may be right. But that point isn’t coming soon, as Microsoft’s Azure still shows sequential strength whether you look at it quarterly or yearly. The company recently announced that it also expects double-digit growth in the coming quarters. It’s kind of funny and gratifying to read what we wrote in the 2014 article about Microsoft’s cloud potential: “The company emphasizes Cloud and Enterprise Mobility Suite. While Microsoft’s phone didn’t change the world, even Apple (AAPL) fans have to admit that the Cortana vs. Siri ad is hilarious and straight to the point. If consumers get your message right, chances are your products will recover as well. Windows tablets could have a nice run according to this article on Seeking Alpha. Long story short, there are encouraging signs that Microsoft could be more than just a dividend stock.”
• If earnings grow 15% per year as expected, earnings per share will be $20 in 5 years. Even if the payout ratio remains at the current low level of 26%, that would give investors an annual dividend of $5.29 per share. This would be almost double the current $2.72/share. Not too bad.

Conclusion

We have all been envious at some point in our lives. We believe that others have everything one way or another: money, fame, health and beauty. In the investment world, the 4 cornerstones according to us are stability, capital appreciation, dividends and balance sheet strength. Few companies have it quite like Microsoft. We remain loyal to Mr. Softie throughout this sale and appreciate the “SWAN” (sleep well at night) attribute he brings to our portfolio.

Introduction

There’s not much to like about tech stocks, as most companies report disappointing numbers and provide disappointing guidance that forces analysts to cut estimates in the blink of an eye. While the software space has certainly benefited from the pandemic tailwinds and is does not escape a reversion to the mean, Microsoft Corporation (NASDAQ: MSFT) is a solid name that deserves our attention as macro pressures continue to drive down tech valuations.

Back to the case of the bull

The simplest bull case for Microsoft is that the cloud migration remains a sustainable growth story despite some moderation. From a top-down perspective, the 1S22 was strong for the public cloud market, which saw over 35% growth, although the big three (AWS, Azure, GCP) saw some deceleration on compositions more difficult. The top three cloud providers now have a total annualized run rate of $147 billion, which was up 36% year-over-year in Q2 from 41% in Q1.

Azure is estimated to have a gross margin of over 60%, while AWS (AMZN) reported an operating margin of 29% in the second quarter. Google Cloud Platform (GOOG, GOOGL), the third-largest remote provider with less than 10% market share, has yet to make a profit but still delivered 36% YoY growth in Q2 vs. 44% in Q2. T1. Unlike some pockets of the tech sector that have been one-time beneficiaries of the pandemic, there is no doubt that cloud migration will continue to be a structural rather than a cyclical theme.

Azure outlook remains strong

In the June quarter (4QFY22), Microsoft reported total revenue growth of 12.5% ​​YoY and +16% in constant currency, which was roughly in line with consensus. Despite some currency impact from a strong dollar, total RPO increased 32% from 28% in the prior quarter. Commercial bookings increased 37% CC to $189 billion. Management highlighted a record number of Azure transactions above $100 million and $1 billion. Azure sales increased 46% (1% below consensus) and are expected to increase 43% in the September quarter (1% below consensus). Despite the slight moderation amid macro concerns over more consumer-centric industries and SMEs, Azure’s growth remains strong on longer booking commitments.

While CEO Nadella was cautious about macro developments during the earnings call, he viewed cloud transformation as a deflationary force in an inflationary environment where companies are forced to do more with less.

That’s why I think that coming out of this macroeconomic crisis, the public cloud will be even more of a winner because it acts as a deflationary force. – MSFT call 4QFY22.

Besides Azure, demand for cloud security continues to be favorable as enterprises look to spend more to protect their data and digital operations. Microsoft reported security revenue growth of 40% year-over-year, approaching the $20 billion mark.

For the September quarter (1QFY23), Azure’s growth is guided to decelerate from 46% CC to 43% CC, where management highlighted some weakness in consumption. Assuming growth slows by about 3 points per quarter going forward, Azure could exit FY23 with a still respectable 34% growth rate in Q4. As the current macro story puts pressure on the technology as a whole, Azure is in an enviable position to capitalize on a strong IaaS (Infrastructure as a Service) market that is expected to grow another 30% to $156 billion in 2023 (Gartner).

PC smoothness is a problem, but a well-understood problem

Microsoft’s Office and Windows revenues are certainly not immune to a slowdown in the PC market. Since the PC segment has been one of the main beneficiaries of the pandemic, all PC manufacturers have seen a normalization in demand this year:

• Asus: With demand headwinds, many are looking at a 10-15% decline in the PC market in 2022.
• Lenovo: The PC market is experiencing weak consumer demand and supply chain issues due to Covid-19.
• HP: Weaker consumer demand and increased price competition
• Dell: Demand has slowed, B2B customers are delaying purchases and are more conservative on IT budgets.

Although the weakness in the PC market will put pressure on Office and Windows revenues, the Windows operating system remains in the dominant position while Office products are very sticky. Microsoft has implemented a 15-25% price increase across the Office family of products, which is a clear indication of pricing power, a highly desirable attribute in an inflationary environment. Overall, while the PC business is undoubtedly experiencing a post-Covid-19 slowdown, markets should already have priced in the impact because nothing lasts forever.

Recent decline presents another buying opportunity

Microsoft’s FY23 forecast calls for double-digit revenue growth with a 4% impact from FX. This shows the relatively robust and defensive nature of the company’s offerings, which should reduce downside risks in my view. While operating margins are expected to be stable (favorable impact of the amortization plan offset by exchange rates), the estimated operating margin for FY23 of around 42% and the FCF margin of around 33% make always from Microsoft a source of profit.

While Microsoft’s valuation isn’t exactly in bargain territory, I suspect negative investor sentiment and cautious positioning should be a good setup for better-than-expected results going forward. As a result, I view the recent share price decline as a buying opportunity at 24.5x forward earnings / 3.9% forward FCF yield and will start to get more aggressive if the valuation breaks the decline at ~ 20x or ~$200 per share.

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Tech stocks like

Apple

and

Microsoft

took a beating this week as key inflation data came in hotter than expected. Despite the sell-off, a top financial adviser remains positive on large-cap tech stocks.

The August inflation report was a shock to the market. The consumer price index rose more than expected, leaving investors more concerned than before about the aggressiveness of the Federal Reserve in its fight to calm still too high prices. This was reflected in the yield on the 2-year Treasury note, which climbed to 3.8% on Wednesday from 3.57% last Friday.

Higher rates are rarely good for the stock market, and Tuesday was no exception as all three major indices suffered their worst losses since June 2020.

Dow Jones Industrial Average
fell 3.9% and the

S&P500
was down 4.3%, but the real damage was in heavy tech

Nasdaq Compound,
which fell 5.2% as shares of Apple (ticker: AAPL) and Google parent Alphabet (GOOGL) fell around 6%, while Microsoft (MSFT) fell 5.5%. Shares of Meta Platforms (META) fell 9.4% for the company’s worst day since Feb. 3.

This makes sense given that growth stocks are particularly sensitive to higher rates. Growing companies, such as those in big tech, generate much of their cash flow in the future, and higher interest rates mean that future cash is worth less than it was when rates were lower.

But Richard Saperstein, chief investment officer for Treasury Partners and a financial adviser ranked No. 7 in 2022 according to Barronssays it remains overweight some of the world’s biggest tech stocks.

“We want to have companies that are non-cyclical, have high free cash flow, structural tailwinds, strong balance sheets, and can sustain a slowing economy,” Saperstein said.

Specifically, Saperstein said he was overweight Apple, Microsoft, and

Alphabet
,

and sees the days when stocks have fallen as much as they were on Tuesday as “an opportunity” for investors who are underweight stocks to add them to their portfolios.

Saperstein calls Microsoft “one of the most critical and indispensable IT vendors.” He also likes that Microsoft has “low levels of regulatory risk,” especially compared to companies like Google and Meta, which “use your data to drive advertising sales.”

Saperstein is a fan of Apple’s “ecosystem” and thinks new products like the iPhone 14 and Apple Watch Series 8 could be potential catalysts for the stock, as well as the continued improvement of its products.

“They add value to new products, they don’t just regurgitate the same product with a bigger screen, but they add value along the way,” Saperstein said. “We’re seeing an increase in sales, an integrated base of phones that are going to be resold to people who have older phones, service revenue is approaching 23% of sales… there’s a huge amount of buybacks and a very solid.”

Even when it’s in disgrace.

Write to Angela Palumbo at angela.palumbo@dowjones.com