Shares of Microsoft (NASDAQ:MSFT) have decreased by almost 30% year to date as a result of investor concerns over a slowdown in the PC market, the company’s crucial Azure cloud division, and enterprise software spending. Although these concerns will probably keep investors on edge, Morgan Stanley analyst Keith Weiss believes the company’s “strong and durable” demand in its commercial businesses should help improve earnings and revenue growth in the second half of 2023. This is making Microsoft stock attractive at these levels.
According to Weiss in a research note, Microsoft’s unique position as a one-stop shop should help demand outperform some of its competitors. Weiss claimed that Microsoft’s “strong competitive positioning” in front of significant growth opportunities in the software market is one of the company’s advantages.
As businesses look to consolidate vendors, “the company looks to sustain current investments to capture market share, win a higher portion of IT budgets, and maintain strategic long-term positioning,” Weiss said.
Microsoft stock has an overweight rating from Weiss and a $307 per share price target, representing a 20% increase over current prices.
Weiss added that Microsoft’s strength has been that its position in key markets has remained unchanged. The company has continued to change where it derives revenue, including Azure and Dynamics 365. Weiss believes that these initiatives will help Chief Executive Satya Nadella and the company achieve its goal of constant currency growth of 20% in its commercial businesses, especially when combined with Office 365’s “relatively durable” growth.
Weiss said that Microsoft is likely to keep experiencing growth in its commercial businesses because there are still promising signs of demand. Earnings commentary, recent conversations with management, channel checks, and the company’s most recent CIO survey, demonstrate this, according to Weiss.
According to Weiss, Microsoft has experienced “strong momentum” in machine learning. Indeed, revenue from Azure machine learning increasing by more than 100% for the fourth consecutive quarter. In addition, GitHub, which the business acquired in 2018 for $7.5 billion, is producing over $1 billion in recurring revenue annually from over 90 million users.
Weiss noted that other commercial business areas, such as Teams, Power Apps, and LinkedIn, have also performed well in recent quarters.
Another possibility is that Microsoft will experience an increase in revenue in the second half of 2023. Weiss predicted that sales would increase as the effects of foreign exchange headwinds subsided. Office 365 price increases took effect, and certain business units, such as Windows, Office Commercial, LinkedIn, and Dynamics, faced more straightforward comparisons.
In addition, due to the company’s recent hiring freeze, operating expense growth is anticipated to “normalize” second half of the fiscal year 2023, and drop to around 8%.
According to reports, Microsoft cut job postings in its Azure security division in July and laid off 1% of its workforce.
Additional layoffs were made in October when Microsoft terminated nearly 1,000 workers from its Xbox division and other divisions.
While things might seem to be going well for Microsoft, Weiss pointed out that some investors have concerns about the tech giant’s margins and revenue growth.
Despite recent headcount reductions, the company’s fiscal second-quarter operating expense guidance still has the potential to be “larger than expected” even as the economy continues to deteriorate and investors place a greater emphasis on margins.
Weiss continued, “And despite all of the focus being on “durable” 20% constant currency growth, a slowing economy also raises the possibility of sales slowing down.”
Microsoft stock recently announced its quarterly dividend of 68 cents per share, which will be paid on March 9 to shareholders of record as of February 16.
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