Microsoft Corporation: Is the stock a buy, sell or hold following its earnings beat?

written on February 3, 2022

In late January, software giant Microsoft hit the headlines for two reasons - the first, for delivering a beat-and-raise report for its fiscal second quarter, which sent its stock up and the second, for its plan to acquire Activision Blizzard for $95 per share in an all-cash transaction valued at $68.7 billion.

The merger which has already been dubbed history's biggest tech deal, will help Microsoft become the world’s third-largest gaming firm by revenue behind Tencent (700) and Sony (SONY).

The company’s solid results confirm and reinforce its ability to drive both growth and margins at scale and this, together with its successful pivot from desktop to cloud computing has helped it earn plaudits. Indeed, the company that once made personal computers mainstream has gone full steam into cloud computing. As a result, its stock has gone up, but after a recent pullback, many investors may be wondering whether it is currently a buy. Read on to find out.

How are Microsoft’s financials looking?

On January 25, the software kingpin beat Wall Street’s targets for the December quarter after announcing its latest earnings, while it guided higher for the March quarter. More specifically, revenue topped $51.73 billion, marking a 20% year-over-year growth increase, beating both FactSet’s consensus of $50.85 billion and MorningStar’s $51.07 billion, while the company earned $2.48 per share, a 22% year-over-year increase.

Solid commercial execution represented by strong bookings growth and driven by long-term Azure commitments, increased Microsoft Cloud revenue to $18.3 billion, up 26%. In effect, of Microsoft’s three business segments, Intelligent Cloud was the top performer in the December quarter, with server products and cloud services revenue increasing 29% driven by Azure and other cloud services revenue growth. On the other hand, its Productivity and Business Processes unit, which includes Office software, as well as the Dynamic and LinkedIn businesses saw sales rise 19% to $15.9 billion. Lastly, the company’s More Personal Computing unit, which consists of Windows software, Xbox video games, Surface computers, as well as internet search and advertising, posted a 15% increase in sales to $17.5 billion.

Meanwhile, for the current quarter, Microsoft expects to generate sales of $48.9 billion, based on the midpoint of its guidance, when Wall Street was modelling $48.1 billion in sales.

Given the ongoing sell-off in software, these results are certainly encouraging and serve as an indication that digital transformation-led demand remains intact, while signals suggest that this is nowhere near to slowing down.

What is Microsoft’s growth potential?

While Microsoft’s prior decade was affected by the 2008 downturn, which marked lagging revenue growth of the transition to subscriptions and the end of its mobile handset revenue from the disposal of the Nokia handset business, analysts have modelled a 5-year compound annual growth rate (CAGR) for revenue of approximately 13%. And key pillars of future growth include Azure, its Office commercial products and cloud services, LinkedIn and its gaming division.

Azure and Office

Regarded as the single most critical revenue driver over the next 10 years, Azure is integral to Microsoft’s future prospects and its server products and cloud services revenue have already jumped exponentially year-over-year thanks largely to Azure. With the cloud theme having evolved, it has become increasingly apparent that companies’ IT environments will be hybrid-based for years to come, so Microsoft’s ability to move clients from an on-premises environment to a cloud-based one via Azure is certainly a structural advantage.

Meanwhile, Office has also been performing fantastically well, with office commercial products and cloud services revenue up 14%. But there’s more to it than just revenues. Office consumer numbers are also up by 15% year-over-year, while Microsoft 365 consumer subscribers grew to 56.4 million, a notable uptick of an impressive 20% increase year-over-year as the company continues its attempts to lure customers to its subscriptions and products such as Microsoft Teams.

LinkedIn

LinkedIn is an important tool in the company’s competitive arsenal. Providing a large database of professionals for companies and recruiters to search and spot talent, as well as the tools to make the process easy, LinkedIn is unique in what it does, while there is no other existing platform that can compare to it. Not only is revenue up by 37% year-over year, driven by strong advertising demand, sessions have also grown by 22% and while engagement remains high, new members continue to join. Currently, the platform boasts more than 810 million registered users. With no clear competitors on the horizon, LinkedIn is expected to continue being the one and only premier tool for professional networking.

Gaming

On the gaming front, it is estimated that in 2021 there were approximately 1.48 billion gamers across Asia alone, making it the largest market for video gaming worldwide, with Europe coming in at second place, with a gaming audience of 715 million according to Statista. With video gaming enjoyed by young and old alike, legendary games, immersive interactive entertainment and publishing expertise has accelerated growth in Microsoft's Gaming business across mobile, PC, console and cloud. Its Xbox Game Pass has grown to 25 million subscribers, thanks to recent big releases like Halo Infinite and Forza Horizon 5. Microsoft is now looking ahead to its planned acquisition of Activision Blizzard, which is expected to close in fiscal year 2023 and will see it publish franchises like Warcraft, Call of Duty, Candy Crash and others.

With Activision Blizzard’s nearly 400 million monthly active players in 190 countries and $3 billion franchises, the move will make Game Pass one of the most compelling and diverse lineups of gaming content in the industry. What‘s more, the acquisition is also set to serve as the building blocks for the metaverse, the so-called next wave of the internet and Microsoft is already well-positioned to catch this.

Is Microsoft stock a buy right now?

Microsoft has become a cloud leader that delivers a wide variety of cloud solutions at scale. Additionally, it has a strong subscription model that gives strong recurring revenues. Microsoft also exited the unprofitable mobile device sector and instead is pushing for cloud based gaming. These factors mean that MSFT is now transformed into a more focused company that offers impressive revenue growth with high and expanding margins. The recently announced acquisition of Activision Blizzard should continue to add value.

With all the above in mind, Microsoft is currently trading below its fair value and therefore, it could be a good time to buy.

How to invest in Microsoft (MSFT) with Moneybase Invest

Ready to invest in Microsoft (MSFT)? Your first step to tapping into a world of investment opportunities with Moneybase Invest is to sign up and open an account.

To do so:

  • Download the app from either Google Play or the Apple App Store. Alternatively, you may access Moneybase Invest on your desktop by visiting https://live.cctrader.com/
  • Once you’ve onboarded successfully and have funded your account, head over to the search bar at the top of your screen and input either the stock name or ticker symbol.
  • Select the instrument of your choice from the list and then click on the Buy button on the window located at the bottom of your screen.
  • On the New Order page, input the number of shares you would like to purchase and hit the Place Buy Order. The stock has been added to your portfolio.


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