Investment thesis

Microsoft Corporation (NASDAQ: MSFT) is one of the top tech holdings in our portfolio. The company has transformed since CEO Satya Nadella took over. The tech giant continues to drive growth in the SaaS space. Moreover, its momentum was also supported by the strength of its Azure IaaS. This allowed the company to continue moving its customers’ legacy workloads and applications to the cloud. Additionally, it is exposed to several software themes in the areas of productivity, automation, cybersecurity, data analytics, CRM, ERP, gaming, and metaverse. Moreover, it also has a cloud communications segment which has grown rapidly.

Therefore, we believe investors can take advantage of the company’s well-diversified technology business model by buying MSFT shares. In addition, the company combines growth and profitability very well.

We explain why MSFT stock should be an anchor stock for tech investors. We also share why MSFT stock is a buy it now.

Key measures of MSFT actions

Microsoft stock has a strong and unmistakable long-term uptrend over time. Therefore, it has proven to be a solid stock for tech investors to hold as an anchor stock. Additionally, investors in MSFT have benefited from market confidence in its resilient business model.

Nevertheless, MSFT stock also suffered during the recent tech bear market. It has fallen more than 15% from its November highs. Admittedly, this was a steep drop for the SaaS monolith. However, its “high growth” but unprofitable/less profitable peers have been beaten even more dramatically (which we discussed in a recent article).

But such a steep correction also created a fantastic opportunity for long-term investors. MSFT’s NTM EBIT multiple of 24.2x returned closer to its 5-year average of 22.2x. Moreover, its NTM FCF yield now seems more attractive at 3.2% (5-year average: 3.9%).

Furthermore, its consensus price targets ((PT)) also look constructive. We can observe that its more conservative PTs have consistently supported Microsoft stock price over the past three years. The stock is currently trading significantly below its most conservative PTs. Our fair value estimates also suggest that MSFT stock appears reasonably valued (+/- 10% of fair value).

Is Microsoft stock worth buying?

Keen tech investors should have a good understanding of Microsoft’s well-diversified business model. The company operates three solidly profitable segments that have continued to support its robust growth. Even its former More Personal Computing segment has seen respectable growth as Microsoft sees a revival in the PC. As a result, it has helped Microsoft turn the wheel in its other productivity suite as its users continue their Windows journey. Chief Financial Officer Amy Hood pointed out (edited): “There are more PCs per household and more time spent on PCs. We continue to see that even with hybrid working. Windows 11, I think, is a great investment to have a modern system and beautiful user experience for Windows. We see a good response.

Product manager Panos Panay also wrote an insightful article in January highlighting the momentum of Windows 11. He articulated (edited):

Windows 11 is a catalyst for engagement and growth. We’ve seen strong demand and preference for Windows 11, with people accepting the offer to upgrade to Windows 11 at twice the rate seen for Windows 10.

Windows 11 also has the highest quality and product satisfaction scores of any version of Windows we’ve ever shipped. Windows 11 drives increased engagement people spend 40% more time on their Windows 11 PC compared to Windows 10.

The benefits of multitasking and productivity Windows PCs are used more than ever with nearly half of Windows 11 users using the new Snap layouts. -Microsoft

We also explained Microsoft’s momentum in cloud computing and cybersecurity. Even though AWS (AMZN) continues to be the #1 hyperscaler, Azure has seen strong momentum in hybrid and multicloud. Additionally, its SaaS advantage has also given Microsoft tremendous leverage to integrate new productivity tools and automation software in-house. Such integration has also been very beneficial for its operating margins seen above in its Intelligence Cloud segment.

Nevertheless, Google Cloud (GOOGL) (GOOG) has also been aggressive lately in the area of ​​cybersecurity. It successfully acquired Mandiant (MNDT) to strengthen its cybersecurity architecture, leveraging Mandiant’s MDR capabilities. Microsoft is also rumored to have expressed interest in the deal. However, Google Cloud probably still needs to acquire a top EDR partner to improve its XDR offering. By contrast, Microsoft already has a highly advanced cybersecurity solution, worth $15 billion, up 45% year-on-year.

Is the MSFT stock a buy, sell or hold?

We think long-term investors should consider the opportunity to add MSFT shares after its recent correction. The stock is so strong and well supported that it has not entered a bear market, even though the Invesco QQQ (QQQ) ETF did briefly enter one.

Additionally, we are confident that Microsoft continues to look very well positioned moving forward. It also has many age-old drivers behind its opportunities. Additionally, its robust profitability and free cash flow will continue to provide investors with a defensive posture in the face of higher inflation and higher interest rates.

Consequently, we reiterate our buy rating on MSFT shares.

Investment thesis

Microsoft (NASDAQ: MSFT) has been a dominant leader in the tech industry for several decades at this point. They started out as an operating system software company, and the overwhelming success of Microsoft Windows and Office catapulted them to the top of the tech industry. They have since expanded into many different branches (cloud service, productivity and collaboration tools, games, etc.). They are one of the truly dominant companies with many competitive advantages.

Recently, due to inflationary pressure and rising labor and supply costs, many companies have seen their margins squeezed. However, Microsoft continues to find new ways to increase its margins. The current global turmoil and economic uncertainty have taken their toll on the stock market, and in particular on tech growth stocks. This volatility has created a rare opportunity to grab Microsoft shares at a bargain price. I think Microsoft is a great option for a long-term investor because:

• Microsoft announced a resounding result in the 2nd quarter of 2022 with substantial revenue growth and an increase in the profit margin.
• Microsoft has steadily increased its margins since 2019 by focusing on more lucrative segments of the business, while maintaining steady growth in the legacy business.
• Additionally, they continue to expand their dominance through substantial organic growth and key acquisitions.

Blowout 2Q 2022 (4Q 2021) Microsoft Results

Microsoft released Q2 2022 (Q4 2021 for the rest of us) results at the end of January, and it was a resounding result. They easily exceeded high and low expectations. Revenue was $51.7 billion, up 20% year-on-year, and operating income was $22.2 billion, up 24%. All segments grew significantly from the same quarter last year, with LinkedIn, Dynamics products and cloud services leading the growth. LinkedIn revenue increased 37% and Dynamics products and cloud services revenue increased 29%.

As an investor focused on business fundamentals, I was very pleased to see an increase in operating margin. The operating margin increased from 41.5% last year to 43.0% this year. This is a remarkable result, especially as many companies are experiencing squeezed margins due to inflation, rising labor costs and supply chain pressure. supply. A margin expansion of this magnitude is a clear indication of product superiority and shrewd business focus on the part of management. I will discuss how they expand their margins in the following sections.

Focus on the good deals

The first secret to expanding their margin – focus on the right business. Tracking the operating margins of each segment (Productivity and Business Process, Intelligent Cloud, and More Personal Computing), Productivity and Business Process and Intelligent Cloud clearly achieve higher profitability than Personal Computing.

Operating margins by segment Microsoft. Table generated by the author. Data Source: SEC Filings

Since 2016, Microsoft has focused heavily on revenue growth in Productivity & Business Processes (Office, Dynamics, and LinkedIn) and Intelligent Cloud (Azure, associated cloud services, and platform). You can clearly see the stronger trend of growth in Productivity and Business Processes and Intelligent Cloud, both of which outpace the More Personal Computing business around 2019.

The growth of Productivity & Business Process has largely been achieved by offering superior products and capturing synergies between products. Microsoft has dominated the operating system and desktop software market for several decades at this point, so the installed base of this software is huge. In addition to the large installed base of operating systems and desktop software, Microsoft offers new products that work seamlessly with other software/platforms, and this synergy further fuels cross-selling and, therefore, revenue growth. Dynamics 365 for Talent with LinkedIn is a great example of the synergistic effect between Microsoft software.

Growth of the Intelligent Cloud platform is achieved through superior AI technology and economies of scale. With the new remote work environment, companies have accelerated their digital transformation, and Microsoft is providing key technologies and infrastructure to achieve this transformation. Additionally, using their vast global footprint and resources, Microsoft has created an extensive network of data centers that provides three major benefits for economies of scale; much cheaper data centers in terms of compute; data centers that provide excellent data coordination and aggregation across diverse customer, geographic and application demand patterns; and data centers that reduce application maintenance costs. With these advantages, their Intelligent Cloud segment is growing at a truly incredible rate, and I expect that to continue for the foreseeable future.

Develop their competitive advantage

The other key element that has driven Microsoft’s growing margin is their constant effort to increase their competitive advantage. Since 2016, they have steadily increased their capital expenditures, increasing from $8.9 billion in 2016 to $24.2 billion in 2021. Additionally, they have consistently spent around 20% of their gross profit in R&D ($22 billion in the last twelve months) . With this kind of investment to increase capacity and improve products, it’s no surprise that their products stay on top for a long time.

In addition, Microsoft has not hesitated to acquire key businesses to strengthen its competitive advantage. More recently, they caused a stir with the acquisition of Blizzard. I think it’s a great decision to acquire top talent in the gaming industry as well as great gaming franchises that will drive future growth. The detailed breakdown of the deal is explained in this article. In 2021 alone, Microsoft has entered into 14 deals, including Two Hat, Clear Software, Peer5, and CloudKnox. These acquisitions will provide key technology and talent to fuel future growth, while increasing revenues.

Estimated intrinsic value of MSFT shares

I used the DCF model to estimate the intrinsic value of Microsoft. For the estimate, I used EBITDA ($90.8 billion) as the cash flow indicator and the current WACC of 7.5% as the discount rate. For the base case, I assumed 20% EBITDA growth (Seeking Alpha Consensus) for the next 5 years and zero growth thereafter (zero terminal growth). For the bullish and very bullish case, I assumed EBITDA growth of 22% and 24%, respectively, for the next 5 years and zero growth thereafter. Given their rapid growth due to existing tailwinds and additional growth from Blizzard and other acquisitions, I think EBITDA growth of 22-24% is quite reasonable. In addition, their expanding margin will contribute positively to EBITDA growth.

The estimate revealed that the current share price is up 15-25%. This estimate shows that the current market volatility provides a rare opportunity to buy Microsoft stock at a bargain price, and I think investors should take advantage of this opportunity.

The assumptions and data used for the price target estimation are summarized below:

• WACC: 7.5%
• EBITDA growth rate: 20% (base case), 22% (bullish case), 24% (very bullish case)
• Current EBITDA: $90.8 billion
• Current stock price: $280.07 (03/11/2022)
• Tax rate: 15%

Risk

Acquiring businesses always involves risk. Especially a company the size of Blizzard can absorb a lot of financial, time and human resources to complete. Even after completion, the cost synergies and increased revenue should be significant enough to justify the cost of acquisition. Additionally, Blizzard has had cultural issues within the company and is exposed to legal issues. Therefore, the investor should closely monitor the news regarding the acquisition process.

There is a lot of turmoil in the world, creating a lot of uncertainty. War, inflation, economic growth rates and supply chain issues all rock the stock market wildly on a daily basis. In this market, it is really difficult to maintain a long-term perspective and not be swayed by short-term market fluctuations caused by headlines. Therefore, the investor must remain committed to a long-term investment.

Conclusion

Microsoft has been an incredible investment for several decades at this point. Market dominance, technological superiority and management’s relentless drive for growth have combined for exceptional profitability and superb long-term growth. I expect this trend to continue for the foreseeable future. I see 15-25% upside from the current level.

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After 15 years of relatively stable performance, Microsoft (NASDAQ:MSFT) stocks went into serious growth mode in 2013. Over the past nine years, MSFT stocks have returned over 960%. The company has a market cap of over $2.2 trillion. This is despite a pullback that has hit many tech stocks and reduced MSFT by 11% so far this year.

Source: Asif Islam / Shutterstock.com

Despite its stumble to start 2022, Microsoft stock remains a top pick. It gets a “B” grade in Portfolio Grader.

Investment analysts polled by The Wall Street Journal classified MSFT as a consensus “buy”. Among the 43 analysts, there is not a single opponent who suggests that you sell your shares. Their average price target of $369.83 has a 25% upside.

While the focus has been on Microsoft’s “new” lines of business, like cloud computing, driving that growth, here’s a reminder that the company’s old lines of business, like its productivity suite Office and Windows also continue to perform very well.

MSFT Stock: don’t forget Office and Windows

When it comes to Microsoft, many investors have focused on industries seen as the future. These are non-traditional areas where the company is enjoying considerable success. In its most recent quarter, Microsoft reported that revenue from Azure and other cloud services grew 46% year-over-year.

Meanwhile, the company continues to make headlines for its planned acquisition of the gaming giant ActivisionBlizzard (NASDAQ:ATVI). This purchase should strengthen the company’s position in everything from Xbox games to the Metaverse. He is seen as an important future driver for the growth of MSFT shares.

I can understand the excitement. However, from my perspective, the key to investing in MSFT stocks is not just the promise of cloud computing, gaming and the metaverse. It’s the economic reliability of the things Microsoft has been doing since day one: Office and Windows. They’re like insurance in case one of Microsoft’s big bets fails, but they also continue to be an important contributor to the company’s success.

Looking at Q2 earnings reported by MSFT in January, productivity and business process revenue grew 19% year-on-year to $15.9 billion. Much of this revenue was generated by consumer and commercial versions of Office products. This represents 31% of the company’s total turnover. The More Personal Computing division had revenue of $17.5 billion. This represents a 15% year-over-year increase and 34% increase in total company revenue. A lot of that was Windows and commercial Windows products. Windows OEM revenue (fees paid by PC manufacturers to install Windows on their computers) increased by 25%.

In short, boring old “legacy” companies like Office and Windows still made up a huge chunk of Microsoft’s revenue. And that revenue continues to grow – it doesn’t fade.

Conclusion on MSFT shares

When considering investing in MSFT shares, you should definitely look to the future. The company’s Azure cloud services and Xbox gaming division – and their combined ties to the metaverse – offer the promise of continued long-term growth.

However, what makes MSFT stock so attractive is that even if the Metaverse fails to reach its potential, even if Surface hardware does not sell as well as hoped, even if the popularity of Xbox games slows and even if Bing never manages to expand its search engine market share, Microsoft will remain a solid company. Because, despite the advances made by competitors, Windows still holds nearly 75% of global market share.

This means that the revenue (and profit) generated by Windows, Office, and related products and services will continue to flow, as they have for decades. Having this huge company in your back pocket is one of the main reasons why an investment in Microsoft is not a gamble.

Chances are, the company’s investments in cloud computing and other technologies will pay off big. The trajectory of MSFT stock over the past nine years shows that the company’s strategy is paying off. But even if things go wrong for a while, the reliable cash cows of Windows and Office will still be there.

With MSFT stock currently down 11% so far in 2022, there is an opening to pick up falling stocks with a high probability that they will generate impressive long-term growth. And little risk that a bad bet on technology will cause them to lose value.

As of the date of publication, Louis Navellier had a long position in MSFT. Louis Navellier has held (neither directly nor indirectly) any other position in the securities mentioned in this article. The InvestorPlace research staff member primarily responsible for this article has not held (directly or indirectly) any position in the securities mentioned in this article.

Louis Navellier, who has been called “one of the most important money managers of our time”, has broken the silence in this shocking “say it all” video… exposing one of the most shocking events in the world. history of our country…and the only movement every American must make today.

The post Don’t overlook the boring legacy companies behind Microsoft Stock appeared first on InvestorPlace.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Investment thesis

Microsoft Corporation (MSFT) stock fell about 15% from its all-time high, following the correction in SaaS stocks. But, MSFT is a strong stock. The company is also extremely profitable and benefits from several age-old cloud computing growth engines. It is also rapidly expanding its Cloud SaaS capabilities, complementing its strength as the second hyperscaler behind AWS (AMZN). It also reinforced its lack of customer interface with its recent $69 billion deal to subsume Activision’s valuable gaming intellectual property (ATVI).

The deal will also include ATVI’s 400 million massive active users. We explained in our previous articles that the metaverse begins with the game. So the “game verse” is already there. Microsoft has indeed acknowledged this as CEO Satya Nadella alluded to recently (edited):

You and I will soon be sitting on a conference room table with our avatars or holograms or even 2D surfaces with surround sound. Guess what? The place where we’ve been doing this forever…is the game.” (FinancialTimes)

MSFT stock is certainly not immune to volatility due to the Russian military operation in Ukraine. However, we think long-term investors should capitalize on the volatility to add long-term leaders like Microsoft stocks. Investors should happily seize opportunities like this, and we encourage investors to load. We discuss more below.

Is Microsoft stock overvalued now?

Based on our fair value estimates, the MSFT share is now back in its fair value zone (+/- 10% compared to our fair value estimates). We therefore believe that Microsoft shares are reasonably valued. In addition, consensus price targets are also hugely supportive of Microsoft stock valuation (note that our implied fair value estimates are different from Street’s price targets).

Readers can glean from the chart above and observe that MSFT stock is now trading below its most conservative consensus price targets (PT). Plus, 44 of Street’s top analysts cover MSFT stocks, so they’re heavily covered. Therefore, we believe that consensus PTs are reliable. The only time MSFT stock crashed well below its most conservative PTs was during the COVID-19 bear market.

However, as we explained earlier, such short-term volatility is impossible to predict. But it didn’t matter that investors had a long-term perspective. The table above illustrates very clearly what we meant.

How does MSFT’s assessment compare to its peers?

We can glean from the above that MSFT shares are trading at a premium to its mega-tech peers. For example, MSFT shares are trading at an EBITDA EV/NTM of 20.4x (3-year average: 20x). In contrast, Meta Platforms (FB) shares are currently trading at an NTM EBITDA multiple of just 8.7x (3-year average 13.5x). But MSFT’s valuation hasn’t hindered its outperformance versus FB stock over the past three years. The MSFT share recorded a gain of 165.5% over 3 years against 28.2% for FB. Even before FB stock’s momentum collapsed, MSFT stock was still far outperforming it.

Additionally, the stock is also trading in line with its 3-year average as shown above. Therefore, MSFT shares also do not look expensive now based on historical averages. We believe this lends credence to our earlier discussion of its fair value and consensus price targets.

Is MSFT stock a good long-term choice?

We recently discussed Microsoft’s FQ2 earnings in an update. We also touched on its recent acquisition of Activision in a previous article.

Microsoft is the king of SaaS. We’ve often discussed how the company has continued to flex its muscles in the SaaS space. Hence, it has helped the company establish its dominance beyond its leadership in the Office suite.

Moreover, the company also has several levers to take advantage of enterprise software. So, it’s hard to find a flaw in Microsoft’s armor that rivals can exploit. Notably, its consumer footprint was previously mostly limited to Windows and its desktop software. However, the acquisition of ATVI will significantly strengthen its interface with consumers once approved.

Additionally, the company has also recently bolstered its multi-cloud offering for its enterprise customers. We discussed in an Alphabet (GOOGL) (GOOG) article how Alphabet CEO Sundar Pichai and his team are capitalizing on the multi-cloud/hybrid-cloud momentum to grow his share. As the #2 hyperscaler, Microsoft Azure is also keen to embrace the transition to multi-cloud/hybrid in its bid to catch up with AWS.

As a result, Microsoft has now made its cloud security offering available to its multi-cloud customers using GCP and AWS. Additionally, we believe that cybersecurity will continue to play an even more critical role as more workloads migrate to the cloud. Thus, Microsoft has cleverly positioned itself to leverage its leadership in cybersecurity to outperform its hyperscaler rivals.

CEO Satya Nadella also highlighted Microsoft’s increased focus on multi-cloud/hybrid cybersecurity for its customers. He added (edited):

Cybercrime is the #1 threat facing every business today. Our goal is to help organizations implement a complete zero-trust architecture that protects people, devices, apps and data holistically in heterogeneous cloud and client environments. The number of customers using our advanced security solutions accelerated this quarter to more than 715,000. On average, customers save 60% compared to multi-vendor solutions. Our security business revenue exceeded $15 billion in the past 12 months, up nearly 45% year-over-year. (Call on Microsoft’s FQ2’22 results)

The recent cyberwar against Ukraine’s assets also highlights the importance of having top-notch cybersecurity systems. Thus, we believe that MSFT has prioritized its multi-cloud push by leveraging its cloud security solutions. Additionally, it uses a proven playbook to gain market share compared to Google Cloud’s more experimental approach using blockchain targeting industry verticals.

Therefore, we think it’s hard to argue with Nadella & Team’s ingenuity in developing tougher drivers for their business. Microsoft continues to leverage its underlying strength in the SaaS space to gain more share in cloud computing. Given its rapid rise to the #2 position, we believe the company is still very early in its cloud opportunity.

Is the MSFT stock a buy, sell or hold?

If you were waiting for a steep and significant correction in MSFT stock before adding, we think now is the time. Unfortunately, we don’t have clairvoyant powers telling you where the bottom is. However, we believe that MSFT’s strong underlying thesis, coupled with its attractive valuation, are reason enough for you to add more exposure now.

As such, we reiterate our buy rating on MSFT shares.

Microsoft (NASDAQ:MSFT) had a very eventful start to 2022. Less than three weeks into 2022, the announcement of a blockbuster deal has been announced, the largest ever. A week later, the company released its results for the second quarter of fiscal 2022. In turn, the company beat analysts’ forecasts for revenue and profit. Meanwhile, PC sales are skyrocketing, which means more copies of Windows are being sold. Additionally, Microsoft’s Xbox Series X game console is still selling out as soon as stores receive delivery. Despite all of this, however, MSFT stock is down around 11% year-to-date (YTD).

The last time we saw such a protracted pullback for MSFT stocks was in early 2020. Stocks skidded for five weeks starting in February of that year. By the time the market crashed in mid-March, Microsoft shareholders had seen their investment lose more than 25% of its value from its highs.

The current situation isn’t nearly as bad though, with MSFT stock around 13% below its November 2021 level. concentrate on just one: its acquisition of ActivisionBlizzard (NASDAQ:ATVI).

Details of the Activision Blizzard acquisition

On January 18, Microsoft announced plans to buy Activision Blizzard. The all-cash deal was valued at $68.7 billion. It is expected to close in 2023.

In turn, MSFT stock saw a very modest rise the day after the deal was announced.

What does Microsoft get by buying Activision Blizzard?

Let’s face it: $68.7 billion is a huge acquisition. Prior to this deal, Microsoft’s previous largest purchase had been LinkedInwhen Microsoft paid $26.2 billion for the professional networking service in 2016.

However, Microsoft is getting a lot for its money from Activision Blizzard.

The game company owns massive video game franchises, including Call of Duty, Monitoring, World of Warcraft and candy Crush. Its games are popular online, on PC, game consoles and smartphones. It has 400 million monthly active players spread across 190 countries.

As I wrote a few weeks ago, Microsoft is playing the long game with this purchase. It will earn immediate revenue streams from sales of popular Activision Blizzard games such as World of Warcraft and Call of Duty. However, Microsoft is betting the deal will also pay off with exclusives that generate more Xbox revenue. It also gives Microsoft a much stronger position in the metaverse. It is a business already valued at nearly $22 billion in 2020 and expected to generate a CAGR of 41.7% through 2030.

Therefore, this mobile games market is particularly interesting because it is an area where Microsoft has little presence. Activision Blizzard says only one of its smartphone titles – Call of duty mobile — generated more than $1 billion in consumer spending in 2021. That’s not a big change, it’s the kind of revenue that could drive MSFT stocks forward.

Moreover, it is also an opportunity for Microsoft to gain visibility on smartphones in general. With no mobile operating system, Windows Phones a (bad) memory, and Cortana for iOS and Android closed, Microsoft had been all but shut out of the smartphone space. So it’s a big market for a company of Microsoft’s stature that has been shut out.

Conclusion on MSFT shares

Collectively, Microsoft’s acquisition of Activision Blizzard isn’t a sure thing. This could getting derailed by regulators concerned about Microsoft’s growing power in the video game industry.

However, I think the agreement is another good reason to consider this portfolio binder A “B” rated stock for your own portfolio. Add the Activision Blizzard deal — with all of its likely perks — to other reasons to love MSFT stocks. With its Azure cloud service, Office subscription revenue, Windows licensing, Xbox sales, Bing search revenue, Surface device revenue, the picture is quite compelling.

It is therefore difficult to say with certainty in which direction the MSFT action will go in the near future. There are too many macro variables like inflation at play. That being said, I think it’s safe to assume that even if this pullback continues for a while, the long-term trajectory for MSFT stock is a return to growth.

As of the date of publication, Louis Navellier had a long position in MSFT. Louis Navellier has held (neither directly nor indirectly) any other position in the securities mentioned in this article. The InvestorPlace research staff member primarily responsible for this article has not held (directly or indirectly) any position in the securities mentioned in this article.

Louis Navellier, who has been called “one of the most important fund managers of our time”, broke his silence by this shocking “say it all” video… exposing one of the most shocking events in our nation’s history… and the one thing every american should do today.

Imagine the perfect stock. To write the perfect script, it would probably go something like this: it’s a leading global player in several technology sectors, including software, cloud computing, gaming, and social media. It has shown strong year-over-year revenue growth and growing profits at a CAGR of 54% over the past three years. It also generates over $50 billion in free cash flow and has negative net debt, and to top it off, it is expected to continue growing.

The above stats are all taken from the Microsoft Q2 FY 2022 release.

Here at the Mare Evidence Lab, we are primarily value investors, but that doesn’t mean we don’t like growing companies. If we buy the hype, we want to see a solid justification. Our growth investment thesis considers the following points:

1. That stock prices will follow corporate earnings over the long term
2. Companies able to steadily increase their profits with good visibility
3. Low to no negative news flow

Back to Microsoft (MSFT), which recently released its second quarter results, the key here is Azure, the company’s cloud computing service. Microsoft shares fell on release despite higher earnings estimates, due to Azure growing slightly below consensus at (just!) 46% year-over-year. The company, however, expects Azure’s growth to accelerate in the coming quarters, driven by “Strong commercial execution, represented by strong reservations growth driven by long-term Azure commitments”, on the earnings call, the company gave updated guidance on Azure and the stock recouped the initial decline. After reviewing the competition for cloud computing, Azure remains one of our top two picks along with Alphabet’s GCP with the best growth prospects in the current market environment. Due to the nature of cloud contracts (over $100 million) and the continued digitization of the industry, we remain confident of Azure’s medium-term growth prospects.

Microsoft’s foray into social media has been through LinkedIn buying and keeping its nose clean of controversy unlike other social media platforms, however, it has proven to be an incredibly strategic asset to others. reasons. With the COVID 19 pandemic driving a workplace revolution, LinkedIn has generated record numbers. We looked at some of the stats the group released with its 2021 annual report. the first time in its history. Not only that, but the user base has also grown to 774 million members and engagement has also increased, with sessions up 30% in 2021 compared to the previous year.

Microsoft made financial headlines this past quarter when it announced plans to buy Activision Blizzard, which we covered in this article last month. As we mentioned at the time, we see no reason for the deal not to materialize, and once completed, Microsoft would become a veritable colossus in the gaming industry, becoming the only real competitor to the two. dominant Asian companies, Tencent and Sony. .

Other tailwinds for Microsoft this past quarter were: personal computing growth with Windows OEM revenue up 25%, in the upper range of expectations; and also cash returns to shareholders, with a $60 billion share buyback program announced in September last year and an increase in the quarterly dividend from the previous year to 62 cents per share (+ 11%).

Risks for Microsoft include the political risks of using industrial data as governments become increasingly protectionist. This could have a potential negative impact on its Azure line of business. While we don’t see any direct negative effect on the stock, we also see the current macroeconomic situation with rising interest rates as a headwind for the tech sector in general. Other more general risks include currency and inflation risks.

Conclusion

Microsoft is by no means cheap in terms of valuation, but as we mentioned at the start of this article, stock prices will follow earnings, and we see clear visibility into the company’s earnings direction. We value Microsoft with a forward P/E 22 of 31.5x using conservative estimates and price the stock with a buy and target price of $360 per share, implying a current upside of 24%. We recommend buying on current market weakness to maximize stock returns.

Summary in seconds

I always rate Microsoft Corporation (NASDAQ: MSFT) shares in the form of Hold. I previously reviewed MSFT’s financial results for the fourth quarter of fiscal 2021 (YE June 30) in my previous article published on August 2, 2021.

I focus on Microsoft Corporation’s most recent results for the second quarter of fiscal year 2022 and its key indicators in this final article. I come to the conclusion that MSFT shares are still stuck, even though it generated another beat in earnings in the last quarter. Microsoft Corporation’s current future P/E multiples in its 20s and 30s are supported by its high ROE, but a slowdown in its sales growth in the coming years will limit future expansion of valuation multiples.

How were Microsoft stock earnings?

Microsoft Corporation’s most recent results for the second quarter of fiscal 2022 were released on January 25, 2022 after market close. According to the company’s second quarter of fiscal 2022 10-Q rating, MSFT’s revenue and diluted earnings per share increased +20% and +22% year-on-year to $51,728 million and $2.48, respectively, in the latest quarter.

MSFT’s revenue and net income for the second quarter of fiscal 2022 were above what the market had expected prior to the earnings announcement. Microsoft Corporation’s second-quarter revenue was +1.9% higher than sell-side analyst consensus forecast of $50.79 billion, while the company’s earnings per share topped +6 .9% the market consensus net income estimate of $2.32 per share.

MSFT Share Price Performance Following Q2 Fiscal 2022 Earnings Announcement

Microsoft Corporation Stock Price Performance Year-to-Date 2022

It’s no surprise that shares of Microsoft Corporation rose +6.9% and significantly outperformed the S&P 500 over the three trading days after posting better-than-expected quarterly results. But MSFT’s stock price is down another -8.3% and has slightly underperformed the S&P 500 in 2022 so far.

In the following section, I highlight a number of key metrics from Microsoft Corporation in the second quarter of fiscal 2022, which gives investors a better idea of ​​the company’s performance over the past quarter and its future prospects.

Key measures of MSFT actions

Despite MSFT’s earnings overshoot and stock price outperformance following the earnings release, I have a mixed view of Microsoft’s recent second-quarter financial performance and outlook after reviewing a few key metrics.

I’m positive about Microsoft’s gaming and Azure businesses.

According to his Q2 FY 2022 results presentation slides, MSFT’s games revenue was up +8% year-over-year in the second quarter of fiscal 2022, with its Xbox hardware revenue and Xbox content and services revenue up +4% and +10% in year-on-year, respectively in the last quarter. At the company Call for Q2 FY 2022 results, Microsoft Corporation noted that the gaming business performed well despite a “good comparable previous year which included the launch of the Xbox Series X and S”.

Notably, Microsoft Corporation also mentioned during the second quarter fiscal 2022 earnings briefing that Xbox content and services revenue growth would have been even stronger without the “weaker performance of third-party titles “. Earlier, MSFT announced plans to acquire Activision Blizzard, Inc. (NASDAQ: ATVI) in a press release issued on January 18, 2022. In the press release, Microsoft Corporation pointed out that ATVI owns “iconic franchises” such as “Warcraft, Diablo, Overwatch, Call of Duty, and Candy Crush”, and pointed out that the deal is expected to “accelerate the growth of Microsoft’s gaming business across mobile, PC, console, and cloud.”

I am impressed with the performance of MSFT’s gaming business in the second quarter of fiscal 2022 despite a strong base in the second quarter of fiscal 2021, and I expect the gaming business to still do better in the future, taking advantage of the ATVI transaction.

Microsoft Corporation’s Azure revenue growth is another key metric to watch. Azure saw an excellent +46% year-over-year revenue growth in the second quarter of fiscal 2022, despite a slight slowdown from +48% in the third quarter of fiscal 2022 according to its presentation of the results of the second trimester. More importantly, MSFT indicated on its second quarter fiscal 2022 earnings call that it expects Azure’s “revenue growth” for the third quarter of fiscal 2022 “to increase sequentially in constant currency”. Microsoft Corporation added during the recent quarterly earnings briefing that Azure represents a “long-term commitment” for “customers” who “choose a partner to help them change the cost structure.”

In my previous August 2, 2021 article for MSFT, I pointed out that “Azure is a very important part of Microsoft’s growth story”, and that consistent Azure revenue growth will serve as “validation strong customer demand for (Microsoft’s) cloud computing services.” As such, it is very encouraging to see that Azure sales growth remained robust in the second quarter of fiscal 2022, as well as the fact that management expects this positive growth momentum for Azure continues in the next quarter.

On the other hand, I’m concerned about the sustainability of Windows OEM revenue growth, weaker-than-expected profitability forecasts, and currency headwinds.

A key driver of Microsoft Corporation’s fiscal 2022 second-quarter revenue and profit growth was the +25% year-over-year jump in Windows OEM revenue, which looks unsustainable going forward. The company’s year-over-year increase in Windows OEM revenue was +10% yoy and +1% yoy for the first quarter of fiscal 2022 and the second quarter of fiscal 2021, respectively . MSFT acknowledged on the second quarter FY2022 investor call that this was “significantly ahead of expectations, driven by the strong PC market” and “6 points of positive impact from the deferral of revenue from $210 million related to Windows 11”. It’s no surprise that MSFT guided a more modest “single-digit” increase in Windows OEM revenue for the third quarter of fiscal 2022.

Separately, according to the company’s outlook presentation for the third quarter of fiscal year 2022, Microsoft Corporation expects to record $13.4 billion to $13.5 billion in operating costs for the third quarter of the year. current exercise. This translates to an operating profit margin of 40.6% (based on the midpoint of management guidance) for MSFT in the third quarter of fiscal 2022, approximately -30 basis points lower (based on S&P Capital IQ data) than Wall Street’s consensus third-quarter operating margin forecast ahead of the recent quarterly earnings announcement. Additionally, Microsoft Corporation’s operating profit margin was higher at 43.0% for the second quarter of fiscal 2022. In other words, MSFT expects a lower operating profit margin on a quarterly basis than third quarter of fiscal 2021, and this is also slightly below market expectations.

Currency headwinds are another concern of mine. MSFT noted in its presentation of the outlook for the third quarter of fiscal 2022 that negative currency effects (in particular the strength of the US dollar) could cause a decrease of “2 points” in “total revenue growth”. Microsoft Corporation also disclosed on its second-quarter fiscal 2022 earnings call that currency fluctuations have already led to “a one-point headwind” for the company’s revenue expansion. business over the last quarter “against expectations”.

In summary, after analyzing some key metrics, I believe that MSFT’s second quarter fiscal 2022 results weren’t as good as they appear. More importantly, I believe there is a risk of earnings loss for MSFT in the third quarter of fiscal 2022 due to slower-than-expected Windows OEM revenue growth, weaker-than-expected profitability and currency headwinds.

What is the Microsoft Stock forecast?

Looking beyond the recent second quarter, I assess Microsoft Corporation’s medium-term financial guidance to see if it supports MSFT’s current valuations.

According to financial estimates from S&P Capital IQMSFT is expected to generate relatively high annual ROE between 31% and 41% between fiscal years 2022 and 2026. In terms of revenue growth, Microsoft Corporation is expected to expand the company’s revenue by a CAGR of + 14.4% for the 2022 financial year – 2026 period.

Microsoft Corporation is currently market-valued at normalized P/E multiples for fiscal 2022 and fiscal 2023 of 32.9 times and 28.8 times, respectively, according to S&P Capital IQ data and based on its last stock price of $308.26 as of January 28, 2022.

In my view, MSFT’s current valuations seem fair. Its forward P/E multiples in the low 20-30 range are justified by its high forward ROE. But the company’s revenue growth is expected to slow from +18% in fiscal year 2021 to mid-1920s percentage in the medium term (fiscal year 2022-2026), indicating that a substantial increase in the valuation multiple of his actions is less likely.

Is the MSFT stock a buy, sell or hold?

I see the MSFT stock as an expectation. In the near term, Microsoft Corporation may miss consensus earnings expectations for the third quarter of fiscal 2022, as I explained earlier. In the medium term, a moderation in MSFT’s revenue growth in the coming years suggests Microsoft’s valuations are fair, but may have already peaked.

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After being caught up in the tech stock meltdown that has hit the sector so far in 2022, Microsoft (NASDAQ:MSFT) stocks rally.

Source: Asif Islam / Shutterstock.com

Until Tuesday’s closing bell, MSFT stock was down 14% year-to-date. However, Microsoft released its second-quarter fiscal 2022 results on Tuesday evening. After a beating in earnings and revenue as well as better-than-expected forecasts, stocks started to rally. In the two days following the earnings, shares of MSFT jumped almost 4%.

Not a spectacular number, but for a tech stock in 2022? Not bad at all.

Does this short rally mean Microsoft stocks have momentum? After five years of strong growth, MFST stock had spat, but the strength of the company was on full display on Tuesday. Multiple strategies are paying off for the company – driven by strong growth in its cloud business – and they have plenty of room for growth.

Additionally, the company showed with its $68.7 billion deal to buy ActivisionBlizzard (NASDAQ:ATVI) that he’s not afraid to spend big to keep his momentum going. Here’s why I think MSFT is a strong candidate for inclusion in your portfolio.

Microsoft delivers second-quarter earnings pace

On Jan. 24, Microsoft released its fiscal 2022 second-quarter results. Wall Street was looking for revenue of $50.88 billion and adjusted earnings of $2.31 per share. Instead, Microsoft reported revenue of $51.7 billion. This was up 20% year-over-year and was led by Microsoft Cloud revenue which grew 32% year-over-year to $22.1 billion. Earnings per share of $2.48 also significantly exceeded projections.

Microsoft doesn’t see its business slowing down anytime soon. The company’s chief financial officer noted that demand remains strong and said MSFT expects third-quarter revenue of between $48.5 billion and $49.3 billion. Once again, that exceeded Wall Street expectations, which predicted revenue of $48.23 billion.

While MSFT stock initially fell sharply the day after the earnings report, it quickly rallied to end the day on a positive note.

Microsoft’s massive cloud business has plenty of room to grow

Microsoft’s cloud business is becoming a growth engine for the company. The good news is that there is still plenty of growth potential, although the landscape is competitive.

The global cloud computing market is expected to grow from $445.3 billion in 2021 to $947.3 billion in 2026. That’s a CAGR of 16.3%. In addition, Microsoft’s share in the global cloud computing market has increased. While market leader AWS has held steady at 32% of the market since late 2017, Microsoft Azure has increased its market share from 13.7% to 21%.

Game growth, the metaverse awaits

Adding to Microsoft’s growth story is the company’s Xbox games division. The Xbox Series X/S has been largely overtaken by the PlayStation 5 so far in this generation. However, Microsoft continues to dominate online and subscription gaming with services like Xbox Live and Xbox Game Pass.

Additionally, the company continues to grow its stable of game development studios. In 2021, it completed the $7.5 billion acquisition of ZeniMax Media, which brought Bethesda Softworks under the Xbox umbrella. This month’s announcement that Microsoft is buying Activision Blizzard in a $68.7 billion deal would make Microsoft the third-largest games company in the world.

These purchases allow Microsoft to add popular games like Bethesda’s Fallout series to Xbox Game Pass. The same will likely be true with ATVI titles like Call of Duty. This increases subscription revenue. Microsoft could also choose to make new Xbox-exclusive titles. Both strategies help to entice gamers to buy an Xbox instead of a PlayStation. MSFT is playing the long game here.

Microsoft also sees the purchase of Activision Blizzard as a key part of the metaverse. ATVI games like World of Warcraft have huge communities of online gamers that interact in what is arguably a metaverse platform. Gaming and the metaverse are both long-term growth opportunities for Microsoft and for MSFT stocks.

Don’t forget the hardware

Let’s not forget Microsoft’s Surface hardware. The slowest-growing division of MSFT, Surface hardware still managed 8% year-over-year revenue growth for the quarter.

Microsoft has tried using its own custom-designed chips in several Surface devices. This offers great benefits in feature optimization – something that Apple (NASDAQ:AAPL) made a big impact with its M1-series MacBooks. Microsoft is rumored to be considering giving up Intel (NASDAQ:INTC) in favor of custom chips for its next generation of Surface devices.

This would give Surface laptops a distinct advantage over other Windows PCs. Combined with a global PC market that has shifted into growth mode over the past two years, such a move could allow Microsoft to boost Surface revenue performance.

Conclusion on MSFT shares

MSFT shares currently earn a “B” rating in Portfolio Grader. It’s a pretty solid choice for investors who focus on long-term growth stocks, as the company’s latest results showed. Among analysts polled by The Wall Street Journal, optimism for MSFT is near universal. Three of the current 44 analysts have MSFT shares rated as “held” versus 35 “bought” and six “overweight.” Their 12-month average price target is $369.58, offering almost 25% upside.

If you already have Microsoft stocks in your portfolio, keep them. If you’re looking to add MSFT stock, there’s no better time than the present.

As of the date of publication, Louis Navellier had a long position in MSFT. Louis Navellier has held (neither directly nor indirectly) any other position in the securities mentioned in this article. The InvestorPlace research staff member primarily responsible for this article has not held (directly or indirectly) any position in the securities mentioned in this article.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Windows Server 2022 arrived without the trappings of previous versions of Windows Server, but organizations with specific needs will appreciate the improvements in this version of the server operating system.

Microsoft has offered Standard and Datacenter editions of its Windows Server operating systems for several years, which continued with Windows Server 2022. However, the company has introduced a new product called Windows Server 2022 Datacenter Azure edition. As the name suggests, this edition ties server workloads more tightly to the Microsoft cloud platform and offers unique features to tempt customers who want easier fixes and other benefits.

Microsoft has decided to abandon the Windows Server Semi-Annual Channel, which was aimed at organizations interested in emerging server technologies, and stick with the Long-Term Servicing Channel, which produces a major feature release approximately every two years. All editions of Windows Server 2022 follow Microsoft’s fixed lifecycle policy and will receive five years of general support followed by five years of extended support. Although Microsoft always recommends a fresh installation of its server operating system, Windows Server 2022 supports in-place upgrades from the previous two versions of Windows Server.