Microsoft Stock – Too High, Too Fast?

After rising 59% from the low on March 23 of this year, at the current price of around $ 215 per share, we believe Microsoft’s actions (NASDAQ: MSFT) has only moderate potential. Microsoft’s stock rose $ 136 to $ 215 from the recent low, better than the S&P which rose about 47%. The rise in stock prices was aided by the Fed’s multibillion-dollar stimulus package announced on March 23, which bolstered market sentiment. The price rose further as Microsoft’s third quarter and fiscal 2020 (end of June) profits exceeded market estimates. In the third and fourth quarters of 2020, due to the coronavirus, the company experienced higher demand for using the cloud and customers had home orders. The company also posted higher demand from Windows OEM, Surface and Gaming, which benefited from increased demand due to the lockdown conditions. The company is currently in talks with ByteDance to purchase the US operations of TikTok, the popular Chinese video app that has come under heavy scrutiny by the US government due to privacy concerns and ties to the Chinese state. .

The stock is now 229% above the levels it was at in late 2017 and has passed the pre-Covid (February 2020) high of $ 189. We believe the company’s stock only has moderate upside potential. Our dashboard ”What factors caused Microsoft stocks to change 229% between 2017 and now?‘ has the underlying numbers.

Part of the increase in the share price over the 2017-2020 period (the year ends in June) is justified by the 48% growth in turnover. Microsoft’s revenue grew from $ 97 billion in 2017 to $ 143 billion in 2020, mostly driven by cloud revenue growth. The company also recorded a 74% increase in net profit, as the net margin improved from 26.4% in 2016 to 31% in 2020.

The share price rose during this period as margins and income increased (and the decline in margins in 2018 was due to a single tax burden). The P / E multiple has also fallen from 20x in June 2016 to 37x currently. We believe the market has been bullish on software companies in today’s environment, which has led to their ascent.

Coronavirus effect

The global spread of the coronavirus has led to lockdowns in various cities around the world, which has affected industrial and economic activity. This will likely negatively affect consumption and consumer spending. Notably, Microsoft’s stock has risen by around 27% since Jan.31, after the World Health Organization declared a global health emergency in light of the spread of the coronavirus. However, during the same period, the S&P 500 Index was up 2%. Despite the coronavirus pandemic, the company recorded 13% growth in total revenue for fiscal 2020. Intelligent Cloud led the recorded revenue growth to 24% year-on-year, while Personal Computing segments and Productivity and Business Processes saw their revenues increase by 9% year-on-year.

Following the Fed’s stimulus – which helped set a floor on fear – the market was willing to “look through” the current period of weakness and take a longer-term view. With investors focusing their attention on the 2021 results, valuations are becoming important in finding value.

So, with strong revenue growth over the years, better than expected revenue for fiscal 2020 despite the downturn has helped Microsoft grow its P / E by 37 times today. With investor attention shifting to 2021, the P / E multiple could rise due to expectations of continued revenue growth and improved profit margin, causing the share price to rise. According to Microsoft’s valuation by Trefis, MSFT’s fair price estimate is $ 226.

While MSFT stock should see a moderate rise in the near term, how Has Google’s stock moved over the years?

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