I am bullish on Microsoft (NASDAQ:MSFT) as its strong growth rate, considerable competitive advantages, and bullish Wall Street consensus complement its reasonable valuation.
Microsoft is an American multinational corporation that produces personal computers, computer electronics, software, cloud computing systems, and other related software. (See MSFT stock charts on TipRanks)
Strengths
Microsoft is considered one of the Big Five information technology sector players in the United States, along with Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Google (NASDAQ:GOOGL), and Facebook (NASDAQ:FB). It offers flagship products like its Xbox consoles, and its lineup of touchscreen computers, Microsoft Surface.
The company was one of the biggest beneficiaries of businesses that turned to cloud services during the novel coronavirus pandemic. Azure, Microsoft’s cloud computing software, successfully captured a 20% share of the $150-billion global cloud market by the end of the first quarter, ended September 2020, and it continues to see further growth.
Azure also has the distinction of being second only to Amazon Web Services when it comes to global market share.
Recent Results
Microsoft announced revenue of $46.2 billion, showing a growth of 25% year-over-year in its fourth fiscal quarter of 2021. The company also reported a net income of $16.5 billion, up 47% from last year, and an earnings per share of $2.17, an improvement of 49% from last year.
Microsoft’s Commercial Cloud revenue grew 36% on a year-over-year basis to $19.5 billion. Azure’s revenue growth was reported at 51%, beating the overall Intelligent Cloud segment’s 30% growth. The company stated that the growth was due to growth in the adoption of cloud services triggered by COVID-19.
Microsoft also reported a 33% increase in revenue in its Dynamic products and Services segment, including Dynamic 365, which grew by 49%. The company’s LinkedIn revenue increased by 46%, and Office Commercial revenue increased by 25%.
It also reported some weak links, with the Officer Consumer segment revenue increasing by a more modest 18%, Surface revenue falling by 20%, and Windows OEM revenue decreasing by 3%.
Overall, for Fiscal Year 2021, the company reported $168.1 billion in revenue, which showed a year-over-year increase of 18%. In addition, the net income was $61.3 billion, earnings per share were $8.05, and operating income was $69.9 billion.
Despite some of the disappointments during the quarter, the company succeeded overall, and reported immense profit and revenue gains.
Valuation Metrics
Microsoft stock looks quite reasonably priced, despite its strong recent results. Its price-to-forward normalized earnings is just 34x and its forward price-to-free cash flow is just 37.2x, both of which are very attractive given how strong recent growth has been, and the formidable competitive advantages that the business enjoys.
In 2022 and 2023, revenue and normalized earnings per share are expected to continue growing by double digits.
Wall Street’s Take
From Wall Street analysts, Microsoft earns a Strong Buy analyst consensus, based on 22 unanimous Buy ratings assigned in the past three months. The average MSFT price target of $336.19 puts the upside potential at 14.4%.
Summary and Conclusions
Microsoft is a fantastic company that attracts some of the best and brightest minds in technology.
It continues to innovate successfully to maintain market leadership in its business segments, and is generating extremely strong growth and profitability.
Meanwhile, its share price remains quite reasonably valued.
Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.
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