Microsoft’s Stock Gained 240% In Last 3 Years, Will The Gains Continue?

by Trefis Team
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[Updated 01/04/2020] Microsoft Update

After gaining nearly 9% since the end of FY 2020 (ended June 2020), Microsoft’s stock (NASDAQ:MSFT) is at its near term potential. MSFT’s stock grew from $204 in June 2020 to near $222 currently, compared to the S&P 500 which gained 20% in the same period. The company has seen a high revenue growth over recent years, and its P/E multiple has also risen. We believe the stock, after the recent rally, is fairly valued. Our dashboard Buy or Sell Microsoft Stock? has the underlying numbers.

Due to the Covid-19 crisis many organizations and individuals shifted toward digitalization and cloud services. This led to Microsoft’s revenue rising by 13% to a consolidated figure of $147 Bil for the last 4 quarters from the consolidated figure of $129.8 Bil for the 4-quarter period before that. For Q1 2021 (ended September) the company beat consensus estimates for revenue recorded at $37.2 billion, up 12% y-o-y and earnings recorded at $1.84 compared to $1.40 in the same period of the previous year. Further, the company reported $19.3 billion in cash inflows from operating activities for the first quarter of FY 2021.

We expect Microsoft’s revenues to grow by 11% to $159.1 billion in FY 2021. Further, its net income is likely to rise to $51 billion, increasing its EPS figure to $6.71 in FY 2021 , which coupled with the P/E multiple of 34.3x will lead to Microsoft’s valuation around $230, up 4% from its current price.

 

 

[Updated 8/04/2020] Microsoft Stock – Too High, Too Fast?

After a 59% rise since the March 23 low of this year, at the current price of around $215 per share, we believe Microsoft’s stock (NASDAQ:MSFT) has only a moderate upside left. Microsoft’s stock has increased from $136 to $215 off the recent bottom, better than the S&P which increased by around 47%. The rise in stock price was helped by the Fed’s multi-billion dollar stimulus package announced on March 23rd which lifted market sentiments. The price further rose as Microsoft’s Q3 and FY 2020 (ended June) earnings beat market estimates. In Q3 and Q4 2020, due to the coronavirus the company saw higher demand in cloud usage and as customers had work from home orders. The company also displayed higher demand of Windows OEM, Surface, and Gaming which benefited from increased demand due to lockdown conditions. The company is currently in conversation with ByteDance to buy the U.S. operations of TikTok, the popular Chinese video application which has come under scrutiny from the U.S. government due to concerns of privacy and ties to the Chinese state.

The stock now stands 229% above the levels at which it was at the end of 2017 and it has surpassed the pre-Covid (February 2020) high of $189. We believe that the company’s stock has only a moderate upside left.

 

Some of the stock price rise in the 2017-2020 period (FY ends in June) is justified by the 48% growth in revenues. Microsoft’s revenues increased from $97 billion in 2017 to $143 billion in 2020, mainly driven by growth in Cloud revenues. The company also saw a 74% increase in Net Income as net income margin improved from 26.4% in 2016 to 31% in 2020.

Stock price increased during this period as margins and revenue grew (and as 2018 margin decline was due to one time tax expense). The P/E multiple also rose from 20x in June 2016 to 37x currently. We believe that the market has been optimistic about Software companies in the current environment, which has led to its rise.

Effect of Coronavirus

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to adversely affect consumption and consumer spending. Notably, Microsoft’s stock is up by about 27% since January 31, after the World Health Organization (WHO) declared a global health emergency in light of the spread of coronavirus. However, during the same period, the S&P 500 index was up 2%. Despite the coronavirus pandemic the company saw a 13% growth in Total revenues for FY 2020. Intelligent Cloud led the revenue growth recorded at 24% y-o-y while the Personal computing and Productivity and Business Processes segments saw revenue increase by 9% y-o-y.

 

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. With investors focusing their attention on 2021 results, the valuations become important in finding value.

What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

 

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