How Sensitive Is Microsoft’s Stock To Changes In Its Operating Margins?

-0.58%
Downside
421
Market
419
Trefis
MSFT: Microsoft logo
MSFT
Microsoft

Microsoft (NASDAQ:MSFT) reported strong revenue growth from non computing revenue streams through fiscal 2017. This trend has continued in fiscal 2018 thus far, with 12% net revenue growth through the first six months of the fiscal year to $53.5 billion. Productivity and Business Processes revenues were up 26% y-o-y to $17.2 billion, while Intelligent Cloud revenues rose 14% to 14.7 billion. Comparatively, More Personal Computing revenues were roughly flat over the comparable prior year period at $21.5 billion. This trend is likely to continue through the end of the fiscal year with net revenues expected to increase in high single digits for the full year.

Additionally, Microsoft’s adjusted EBITDA margin has consistently improved in recent years, from around 36% in FY 2015 to 39.4% in FY 2017. Despite an increase in Microsoft’s R&D and SG&A expenses in the period, its operating profit margin improved primarily due to healthier gross margins in the Personal Computing segment. Going forward, the company expects LinkedIn integration to contribute towards expense synergies that could help improve  Productivity and Business Processes margins. Furthermore, Intelligent Cloud margins could also pick up, owing to economies of scale. The company has a 5-point improvement plan to help boost gross margins of these two segments, primarily across the Azure and Office 365 product lines. We have a conservative forecast for the company-wide EBITDA margin, expecting a 60 basis point improvement to 40%, as the company continues to manage operating expenses more efficiently. However, if improvement in the company’s EBITDA margin happens sooner than anticipated, there could be an upside to Microsoft’s valuation.

Relevant Articles
  1. Up Nearly 70% Since The Beginning Of 2023, Where Is Microsoft Stock Headed?
  2. Up 63% Since The Beginning Of 2023, How Will Microsoft Stock Trend After Q2 Earnings?
  3. Microsoft Stock Is Up 45% YTD And Outperformed The Consensus In Q1
  4. Microsoft Stock Outperformed The Expectations In Q4
  5. Microsoft Stock Is Fairly Priced At The Current Levels
  6. What To Expect From Microsoft Stock In Q3?

We have summarized the upside scenario on our interactive dashboard platform, where you can modify assumptions such as changes in expected revenue or margins to see how they impact the company’s value. The image above shows one of the key steps in identifying Microsoft’s valuation sensitivity to changes in its EBITDA margin. We detail how changes in EBITDA margin impacts total EBITDA, which in turn impacts its valuation (assuming a constant EBITDA multiple).

See our complete analysis for Microsoft

What’s behind Trefis? See How it’s Powering New Collaboration and What-Ifs

For CFOs and Finance Teams | Product, R&D, and Marketing Teams

More Trefis Research

Like our charts? Explore example interactive dashboards and create your own.