Microsoft’s Stock Has More Than 10% Upside

MSFT: Microsoft logo

At the current price of around $235 per share, we believe Microsoft’s stock (NASDAQ: MSFT) has moderate growth potential in the near term. MSFT stock has risen by 258% since the end of FY 2017 (ended June 2017) compared to the S&P500 which has increased by 64% in the same period. Both revenue and earnings rose in the first half of FY 2021 (FY ends in June) as the Covid-19 pandemic pushed individuals and organizations toward digitalization and cloud offerings.

There are suggestions that Microsoft is in exclusive talks to acquire Discord for the price of nearly $10 billion. Discord is known as a social hub for millions of gamers across the world – all types of communities are using it, including various businesses who use the technology for seamless collaboration. The acquisition, if it were to happen, could be a huge step forward in Microsoft’s digital transformation segment, one of its biggest growth areas. Though a lot will depend on how Microsoft utilizes the platform and inculcate it with its existing solutions.

Over the recent years, the company has seen earnings rise while its P/E multiple has also increased. Our dashboard ‘Buy or Sell Microsoft’s Stock?‘ provides the key numbers behind our thinking.

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Microsoft’s revenue rose from $96.6 billion in FY2017 (ended June 2017) to $143 billion in FY2020 (ended June 2020). Net income margin increased from 26.4% in FY 2017 to 31% in FY 2020. On a per share basis, earnings went up from $3.29 to $5.82 while the company saw a 1.8% fall in shares outstanding.

During the same period, the P/E multiple jumped from 20x to around 35x. The P/E improved slightly in FY2021 and is currently around 40x.

Where Is The Stock Headed?

The global spread of coronavirus led to lockdown in various cities across the globe, which affected industrial and economic activity. This, in turn, promoted digitization of organizations with a push for remote working. Microsoft saw revenues increase by 15% to $80.2 billion for the first half of FY 2021. For the same period earnings increased to $3.85 compared to $2.90 in the previous year.

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. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again. In 2021 we expect MSFT revenues to rise to $164.6 billion, up 15.1% y-o-y. Further, its net income is likely to rise to $53.4 billion, increasing its EPS figure to $7.02, which coupled with the P/E multiple of 38.2x will lead to Microsoft’s valuation around $268 per share, up by 14% from the current market price.

While Microsoft’s stock has an upside, looking for reasonably valued software stocks with big room to grow? Check out our theme on Mid-Cap SaaS Stocks.

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