Microsoft Corporation’s (NASDAQ:MSFT) stock has risen dramatically after its fourth-quarter solid results report in late July. Even if the consumer-end market performs poorly, we emphasized in a pre-earnings editorial that Azure’s growth cadence should continue to improve its performance. Notably, despite slowing usage-based spending, Microsoft provided better-than-expected guidance on Azure growth. As a result, it illustrates that Azure has a stable base revenue resistant to macroeconomic headwinds, giving credence to its revenue visibility.
However, we noted that MSFT’s recovery from its June low had been too quick for our liking and that a correction is overdue as it has pushed over our fair value estimates. As a result, we downgrade MSFT from Buy to Hold and advise investors to wait before buying more exposure.
Investors Can Look Forward to a Better FY23
As seen above, consensus estimates (extremely bullish) indicate that Microsoft’s sales and adjusted EBIT growth may reach a low in FQ1’23 before recovering significantly during FY23. As a result, even if the company’s FY23 projection fell short of earlier consensus estimates, the market was not disappointed.
Given the decline in MSFT since November 2021, we believe the market has already forecasted the slowdown for H1’22 through FY23. Our belief in the market’s bottom in June/July has significantly boosted MSFT purchasing sentiment. Regardless, investors should continue to monitor the development trajectory of the company’s primary source of growth: Microsoft Cloud. As shown above, its revenue growth has remained moderate, despite accounting for a larger share of total revenue.
Microsoft Cloud sales increased by 28.2% in FQ4, compared to 32.2% in FQ3. Notably, its revenue share grew to 48.2%, up from 47.4% in the previous quarter. Nonetheless, we are glad that Azure’s growth cadence continues healthy. Microsoft reported 43% YoY growth (in constant currency), somewhat lower than the 46% increase reported in Q4. As a result, it illustrates the robustness of growth cadence, which may support the company’s capacity to maintain its Cloud sales momentum.
According to the Wall Street Journal, [Microsoft] has supplied talking notes to rival cloud providers to urge Washington to require key government projects to employ more than one cloud service – WSJ. Furthermore, Azure has recently made more aggressive steps to capture market share against AWS (AMZN). As a result, it looks like CEO Satya Nadella and his team are aiming to put further pressure on Amazon’s dominance in the IaaS industry to spur additional growth.
Furthermore, Microsoft expanded its multi/hybrid cloud strategy by reinforcing its cooperation with Oracle (ORCL) to enable greater interoperability between their platforms, enhancing access for their mutual clients. As a result, we are convinced that Microsoft Cloud has a powerful moat that appears to be gaining in size as it distances itself from Google (GOOGL) (GOOG), which is still chasing profitability and closing the gap on AWS.
MSFT’s Price Action Corroborates a Long-Term Bottom
As shown above, we believe MSFT formed its long-term bottom in June on its long-term chart. Over the last eight years, MSFT’s long-term uptrend has been regularly supported above its 20-month moving average (red line). MSFT has retaken its 20-month moving average, attempting to sustain further purchasing higher from July and August. As a result, the price action is quite positive, and we do not anticipate further declines to the intermediate support ($200).
Is Microsoft a Buy, Sell, or Hold?
MSFT’s rating has been changed from Buy to Hold. MSFT’s buying momentum could help drive its short-term gain even further. However, given a slower growth profile in the future, we believe the risk/reward profile appears better balanced at the current levels. According to our internal fair value calculations, investors should wait for a correction before adding exposure.
Featured Image: Megapixl @Micka
