Is Microsoft Stock a buy after earnings? (NASDAQ: MSFT)

Microsoft (NASDAQ: MSFT) arguably single-handedly launched a rally in tech stocks, as it showed that it will take more than inflation or the Russian-Ukrainian war to halt the digital transformation growth story. MSFT continues to show secular growth and strong margins – while rewarding shareholders with growing dividends and share buybacks. While the stock doesn’t trade as cheaply as its tech counterparts, this is a company that has earned its right to be some sort of tech indicator and its valuation reflects that. The stock remains a buy, and I could see the operating leverage helping the company sustain double-digit earnings growth for years to come.

MSFT stock price

After peaking at just under $350 per share early in the year, the stock has since fallen 20%.

Every time a title like MSFT drops that much, one would logically assume that the rest of the tech must be even lower (and in this case, they would be right). I last covered MSFT in May, where I discussed the virtues of the stock as a dividend stock. The company’s continued strong results show that MSFT is a reliable cash flow machine.

What were the expected benefits of Microsoft?

MSFT was due to report earnings on July 26, when it was expected to report $2.17 in earnings per share and $52.36 billion in revenue.

Did Microsoft beat earnings?

While the company narrowly missed on both fronts, exchange rate headwinds negatively impacted results. We can see below that after adjusting for constant currency, MSFT’s results were well within the limits of its own previously published guidance.

Key measures of MSFT actions

During the quarter, MSFT generated revenue growth of 12% (16% in constant currency) and earnings per share growth of 3%.

Most investors may be familiar with MSFT because of its productivity products such as Microsoft Word. These branded products continued to grow at a double-digit pace, with LinkedIn leading the way with revenue growth of 26%.

During the conference call, management noted that LinkedIn’s strength was particularly impressive considering that, like other online advertising companies, it was facing headwinds in the weak online advertising market. .

In my opinion, cloud computing is quickly becoming one of MSFT’s most important stories. Azure and other cloud services grew by an impressive 40% in the quarter, driving 22% overall growth in server products and cloud services.

While MSFT doesn’t explicitly detail Azure’s financials, based on disclosed numbers, I estimate that revenue from Azure and other cloud services hovered around $9 billion during the quarter.

MSFT saw a slowdown in its “more personal computing” segment, which is understandable given the difficult comparables related to the pandemic.

During the quarter, MSFT returned $12.4 billion to shareholders through $7.8 billion in share buybacks and $4.6 billion in dividends.

The company ended the quarter with $104.7 billion in cash versus $49.7 billion in debt — that’s the kind of company I expect to manage long-term net debt.

What to expect after winnings

These results were good, but probably not too spectacular. Instead, it’s the advice that’s been “heard around the world.” MSFT guided “double-digit revenue and operating profit growth” driven by “the continued momentum in our business operations and our focus on market share gains across our portfolio.”

Normally, this kind of comment is nothing special. But given the sharp moves in stock prices in the tech sector, this kind of guidance has allayed fears of a tech apocalypse. Given the resemblance between today’s stock prices and the tech stock market crash of 2000-2001, some investors may have been expecting tech earnings to be very disappointing. MSFT proved them wrong.

Is MSFT a good long-term investment?

In the long term, I expect MSFT to continue to drive digital transformation in enterprises while continuing to aggressively expand its cloud operations. Consensus estimates call for double-digit earnings growth over the next decade.

I consider these estimates to be conservative, as they reflect minimal operating leverage relative to revenue growth.

MSFT is expected to generate net margins of 40.7% in 2032, only slightly above the net margin of 34.6% expected this year.

Is the MSFT stock a buy, sell or hold?

With shares trading at 27 times forward earnings, the stock might not look conspicuously cheap to the casual observer. And indeed, that valuation doesn’t reflect nearly the same pessimism seen elsewhere in the tech sector, with many tech stocks down 80% or more. But unlike most tech stocks, MSFT has been able to combine secular growth with robust GAAP profitability, while rewarding shareholders with dividends and stock buybacks. I could see MSFT trading up to 40x earnings over time as it continues to deliver double digit growth in top line and bottom line. This reflects 50% upside potential, but I note that in practice this upside may more likely be spread over several years – in conjunction with double-digit growth, this should lead to above-market returns. There are two main risks here. First, given that MSFT is already a $2 trillion company, the law of large numbers suggests that growth rates should eventually slow. This in turn can lead to a contraction in valuations, which can erode shareholder returns. While there are many examples of slow-growing stocks trading at rich multiples, there is no guarantee that MSFT can attract a similar shareholder. My view is that operating leverage should help MSFT sustain faster earnings growth for at least several years. I continue to view MSFT as a buy due to the potential to beat the market, but point out that there are better buying opportunities elsewhere in the tech space.