The progress of Microsoft’s shares (NASDAQ:MSFT) in the year-to-date has been an impressive 34%. However, this achievement might appear less exceptional when compared to the performance of some other mega-cap tech counterparts. Microsoft’s returns have fallen behind the Nasdaq QQQ Invesco ETF (QQQ), which saw a nearly 38% gain in 2023. Additionally, all five FAANG stocks have outpaced MSFT, with Apple (NASDAQ:AAPL) rising by 37.5%, Netflix (NASDAQ:NFLX) gaining 43.8%, Alphabet (NASDAQ:GOOGL) rallying 46.5%, Amazon (NASDAQ:AMZN) surging by 65%, and Meta Platforms (NASDAQ:META) leading the pack with an astounding 151% breakout.
Nevertheless, an unexpected surge in macroeconomic concerns, including significant downgrades from Fitch and Moody’s, coupled with soft economic data from China, has exerted pressure on the recent momentum leaders across the stock market. For Microsoft, this has translated to a 12% decline from its 52-week peak of $366.78, which was set less than a month ago on July 18.
With this context in mind, the question arises: Is now an opportune moment to acquire shares of this non-FAANG tech giant at a relatively discounted rate? Let’s delve into the recent performance of the software behemoth and determine whether investing in MSFT stock at its current valuation is advisable.
Analyzing Microsoft Stock: Buy, Sell, or Hold?
In fiscal Q4 of 2023 (ending in June), Microsoft announced revenue of $56.2 billion, marking an 8% year-over-year increase. Adjusted net income also experienced a remarkable 20% surge to reach $2.69 per share. Microsoft outperformed revenue and earnings projections of $55.4 billion and $2.55 per share, respectively. However, investors have been observing the company’s cloud sales decelerating over recent quarters.
In Q4, Microsoft’s intelligent-cloud vertical sales exhibited a 26% year-over-year growth. Nonetheless, the top-line expansion has slowed down in recent quarters due to reduced enterprise spending in the midst of a challenging macroeconomic environment.
Over the past decade, Microsoft’s cloud computing business has played a pivotal role in its growth trajectory. The company’s management confirmed during an earnings call that Microsoft Cloud revenue had surpassed an impressive $110 billion in annual sales, marking a 27% year-over-year increase. Notably, the intelligent cloud segment, Azure, contributed to over 50% of the total cloud sales for the first time in fiscal 2023. Industry projections suggest that the cloud computing market could expand to $2.4 trillion by 2030, providing ample room for Microsoft’s top-line results to ascend.
Microsoft’s commanding presence spans various domains, including cloud services, gaming, artificial intelligence, and enterprise solutions. Despite the inflationary climate, the company’s strong competitive advantage facilitated a 10% increase in gross profits, totaling $39 billion. Operating profits also witnessed a growth of 14.3% to reach $24 billion, resulting in an operating margin of 43%.
Microsoft’s Path to AI
A long-term catalyst for MSFT stock is the realm of artificial intelligence (AI). The company took early strides in AI through its substantial investment in ChatGPT’s OpenAI. A research report by Mordor Intelligence projects that the cloud-based AI market will reach $207 billion by 2028, a significant leap from $51 billion in 2023, reflecting an annual growth rate of 32%.
The global demand for leveraging AI and developing machine learning capabilities is evident, with thousands of companies seeking Microsoft’s products for these endeavors. In the Q4 earnings call, CEO Satya Nadella emphasized the momentum in Azure OpenAI Service, citing the service’s adoption by more than 11,000 organizations, including industry giants like IKEA, Volvo Group, Zurich Insurance, and innovative digital entities such as Flipkart, Humane, Kahoot, Miro, and Typeface.
During fiscal Q4 alone, the AzureAI business onboarded an impressive 100 customers daily.
Setting Sights on MSFT Stock’s Target Price
With a market capitalization of $2.4 trillion, Microsoft is anticipated to see adjusted earnings rise from $9.81 per share in 2023 to $10.85 per share in 2024, and further to $12.35 in 2025. The stock is currently valued at 10.2x forward sales and 29.5x forward earnings, indicating a relatively higher valuation.
Among the 39 analysts closely tracking Microsoft stock, 29 recommend a “strong buy,” three suggest a “moderate buy,” two recommend a “hold,” and one advises a “strong sell.” The average price target for MSFT stock stands at $384.42, which is approximately 19% higher than the present trading price.
Looking into the future, Microsoft is poised to report accelerated revenue growth over the next three years. Moreover, the burgeoning AI trend, though still in its nascent stages, holds the potential to contribute billions of dollars in sales for Microsoft by 2030. The company’s commitment to research and development remains steadfast, enabling an expansion of its array of innovative products and solutions. In Q4, Microsoft allocated $6.7 billion to research and development, accounting for around 12% of total revenue.
Despite recent market fluctuations, Microsoft’s substantial market share, resilient customer base, and promising growth prospects position MSFT as an enticing stock to consider acquiring during its downtrends.
Featured Image: Unsplash @ wocintechchat
